Consumer Long-Term Inflation Expectations Hit 12-Year High

Consumer Sentiment Index Slid to Lowest Since November
Clearance sale at an Illinoisstore
Clearance sale signs are displayed at a retail store in Downers Grove, Ill. (Nam Y. Huh/Associated Press)

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U.S. long-term inflation expectations unexpectedly accelerated in early May to a 12-year high and consumer sentiment soured, reflecting growing concerns about the economic outlook.

Consumers see prices climbing at an annual rate of 3.2% over the next five to 10 years, according to the preliminary May reading from the University of Michigan. They anticipate costs rising 4.5% over the next year, compared to last month’s 4.6%, data May 12 showed.

The consumer sentiment index slid to 57.7, the lowest since November and weaker than all forecasts, from 63.5 last month.

“While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff,” Joanne Hsu, director of the survey, said in a statement.

Consumer confidence also dropped sharply during the 2011 debt-ceiling crisis but snapped back after its resolution.

A combination of high inflation and recession concerns has long weighed on sentiment. That said, spending has generally held up with the help of widespread job opportunities and continued wage gains.

Inflation expectations and consumer sentiment

A necessary component of returning inflation to the Fed’s 2% target is keeping long-term inflation expectations anchored at a low level. While the pickup is concerning, Hsu noted that there were few signs consumers were buying in advance to avoid future price increases.

That suggests “the rise in long-run inflation expectations did not reflect the growing influence of inflationary psychology or increased risk of a wage-price spiral,” Hsu said.

Buying conditions for durable goods declined to a five-month low in early May, with about 42% of respondents blaming high prices for eroding their living standards.

Consumers’ perception of the economic outlook over the next 12 months and five years both fell to the lowest since July. While views of their current financial situation improved slightly, expectations deteriorated.

The university’s overall measure of expectations fell to a 10-month low of 53.4. The current conditions gauge also decreased.

— With assistance from Kristy Scheuble.

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