U.S. consumer inflation expectations unexpectedly fell, with both short-term and long-term gauges showing a decline, according to the latest data released by the University of Michigan. This news temporarily boosted the stock market while putting pressure on the dollar.
In August, the one-year inflation rate expected by American consumers fell to 3.3%, down 0.1 percentage point from July. This is the lowest reading since April 2021, defying market expectations of a rebound to 3.5%. However, it is still higher than the range of 2.3-3.0% seen in the two years before the COVID-19 pandemic.
Longer-term inflation expectations for consumers over a 5- to 10-year period also declined by 0.1 percentage point to 2.9%. Despite the decrease, long-term inflation expectations remain relatively high.
The decline in inflation expectations dampened the Federal Reserve’s outlook for further rate hikes and maintaining high interest rates for an extended period. As a result, the U.S. dollar experienced a significant drop, while the three major U.S. stock indexes rebounded. The Dow, which is more sensitive to the economy, turned positive.
The data also revealed that although prices for gasoline and food increased, the initial consumer confidence index slightly fell to 71.2 in August. However, it remains higher than the market expectation of 71 and near the highest level since November 2021. The initial value of the current conditions index exceeded expectations, reaching 77.4, while the initial value of the expectations index stood at 67.3.
Survey director Joanne Hsu highlighted the remarkable stability of short-term inflation for three consecutive months. Hsu pointed out that this indicated greater consumer confidence and a belief that inflation might have turned a corner.
However, the report also revealed that more than a third of consumers expressed concerns about high prices eroding their living standards. They stated that they were still financially impacted. Hsu emphasized that the direction of consumer confidence in the future will rely on the development of the labor market. Positive labor market conditions would be good news for consumers. While confidence has recovered to some extent, consumers remain cautious about changes in the labor market that could influence their spending behavior.