CONSUMER INFLATION EXPECTATIONS KEY POINTS:
- April U.S. consumer inflation expectations at a one-year horizon falls to 6.3% from 6.6% in March
- In contrast, longer term inflation expectations (36-months) edge up to 3.9% from 3.7%
- U.S. stocks hold losses as investors remain focused on the April CPI print expected to be released Wednesday
U.S. consumers’ short-term inflation expectations retreated last month, but remained near record levels according to a report released Monday by the Federal Reserve of New York. For reference, the survey results are not an official projection by the U.S. central bank, but one of several data sets that are closely tracked to follow developments in the economy.
Digging into the numbers, the monthly survey showed that one–year inflation expectations fell to 6.3% from their all-time high of 6.6% set in March, a modest pullback but a welcome step in the right direction. At the three-year horizon, Americans anticipate CPI to rise 3.9%, up modestly from 3.7% one month ago.
It is too soon to make general assumptions about these results, however, if consumers believe that inflation will come down in the near-term, they will not likely demand higher and higher pay on a pervasive basis, reducing employment costs for businesses and the risk of a “wage-price spiral”. These dynamics may eventually help bring down inflation, but the process will not play out overnight.
On the labor market front, the proportion of survey participants who expect the unemployment rate to be higher 12 months from now increased by 0.1 percentage point to 36.3%, a negligible change but the highest reading since February. Looking ahead, this metric needs to be watched closely because if consumers believe that hiring conditions will deteriorate, they may begin to curtail discretionary spending. This could become a problem for the economy, considering that consumption accounts for roughly two-thirds of the country’s GDP.
This morning’s New York Fed survey results did not elicit any significant market reaction, as investors remain concerned about growing headwinds for the U.S. economy, including rising rates, soft corporate earnings growth, supply chain bottlenecks and the increasing likelihood of recession. For these reasons, U.S. stocks sustained sharp losses after the survey crossed the wires, with the S&P 500 down roughly 2.5% and Nasdaq 100 plummeting about 3% on the day.
Looking ahead, there is no relevant economic data on Tuesday, but on Wednesday, there is a high-impact event on the calendar: the U.S. April CPI report. If inflationary forces ease more than expected, a relief rally could be in the cards, but if price pressures don’t cool significantly and top out, we can’t rule out more pain for stocks in the near term.
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—Written by Diego Colman, Market Strategist