Consumer fears about inflation eased in December as energy prices eased and the impact of interest rate hikes eased.
The latest University of Michigan consumer sentiment survey released Friday showed the one-year outlook for the inflation rate fell to 3.1%, down from 4.5% in November, the lowest since March 2021. The five-year outlook also went down, down. It was 2.8% from 3.2% in the previous month.
Federal Reserve officials view consumer expectations as key to moving inflation, so a shift in sentiment could prompt policymakers to hold interest rates on hold and begin cutting in 2024. The University of Michigan study is one of the most closely watched metrics.
Inflationary sentiment is particularly closely tied to the direction of energy costs and prices at the pump. The price of a gallon of unleaded gas has fallen 22 cents to $3.18 in the past month, according to AAA.
A combination of a benign inflation outlook and a solid November jobs report helped lift stocks in early trade. Treasury yields also rose, though they were off session highs.
Of course, inflation expectations are volatile; The one-year outlook was 3.2% in September, rising in October and November.
The central bank is trying to reduce inflation through a series of 11 interest rate hikes starting in March 2022. The hikes pushed the central bank’s benchmark lending rate to 5.25 percentage points, its highest level in more than 22 years. Central bankers believe rate hikes work with a lagged effect and are reluctant to declare success as policy tightening works its way through the economy.
Consumer sentiment generally rose in December. The University of Michigan’s index of consumer sentiment rose more than 8 points to 69.4, its best level since July. The current conditions index came in at 74, up nearly 6 points, while the expectations index rose nearly 10 points to 66.4.
A Labor Department report showed earlier in the day that nonfarm payrolls expanded to 199,000 in November, up from an estimate of 190,000. The unemployment rate fell to 3.7%.