MNI INTERVIEW: Easing Price Expectations Unreliable - UMich

Consumer expectations for inflation have shown tentative signs of moderating but the easing provides little comfort since it appears based on slow-to-appear inflation effects and volatile tariff policies set by the Trump administration, the head of the University of Michigan's Survey of Consumers told MNI.

"Consumers do recognize that there were fears about inflation that have not come to fruition at this moment, but they still reserve judgment about whether it's coming back," said Joanne Hsu. "This two or three months decrease in inflation expectations, we of course all hope that it sticks, but it could very well turn around again if actual inflation starts or if we start seeing the impact of tariff hikes on actual inflation, or if tariffs continues to escalate." 

The University of Michigan survey's inflation expectation measures declined in the preliminary July report with the median expected year-ahead inflation rate moving down a second straight month to 4.4%, the lowest reading since January. The median long run inflation expectation rate eased to 3.6%, the lowest since February.

"Consumers have really been bracing for some worst case scenarios, or for some catastrophic consequences of the extremely high tariffs that had been implemented and paused in April," said Hsu, a former principal economist at the Fed board's division of research and statistics. "They think the risks of that have come down a bit, and we're seeing that in the inflation expectations."

"I imagine policy makers will be quite heartened by the fact that inflation expectations are coming down, but they are still much higher than they were last year," she said. "While they're moving in the right direction, the fact that consumers continue to expect an acceleration in inflation, it speaks to that side of the dual mandate which policy makers will have to balance." (See: MNI INTERVIEW2: Tariffs Inflation Impact Slow To Come -Mester) 

LINGERING LABOR CONCERNS

The University of Michigan’s Consumer Sentiment Indicator increased 1.8% on the month to 61.8, but is still down 6.9% from a year ago. The Current Economic Conditions index jumped 3.1% in the month to 66.8 and is up 6.5% since a year ago.

Hsu downplayed any changes in sentiment and stressed that tariff policies changes are driving conditions. "They are concerned that tariff hikes continue to be a possibility and and the current or future state of high tariffs are going to eventually pass through to the prices that they face." 

"The number one factor, by a huge margin, continues to be trade policy, other things like the tax and spending bill, the President's rhetoric around the Fed - and there are a handful of comments on those - but it pales in comparison to the 60% of consumers who are spontaneously giving us comments about tariffs."

Hsu said the survey will be bringing back questions about consumer trust of the Federal Reserve and other financial institutions in the coming months.

Almost 60% of consumers expect unemployment rates to rise in the year ahead, she said. "That's little changed from last month and almost double the 35% who thought so a year ago." 

"We still have consumers expecting labor markets to weaken. Income expectations continue to be weak, little change from last month, but much lower than six months ago or a year ago," she said. "Consumers are still expecting the economy to slow down."