U.S. consumers tempered their inflation expectations in July alongside a sharp drop in gasoline prices over the past month, a development likely to be welcomed by Federal Reserve officials worried that expectations for high inflation could become embedded and complicate their task of reining in price increases.
The University of Michigan's preliminary survey of consumers for July published on Friday showed consumers see inflation running at 2.8% over a five-year horizon, the lowest in a year and down from 3.1% in June. Their one-year outlook for price increases moderated to 5.2% from 5.3% a month earlier and was the lowest since February.
The survey's elevated reading of consumer inflation expectations in June's preliminary survey was a factor in Fed officials' decision to lift interest rates last month by three-quarters of a percentage point rather than by just a half point.
The Fed is expected to lift rates again this month by at least the same margin as in June with key measures of inflation still running at four-decade highs. Wednesday's higher-than-expected reading of the Consumer Price Index has fueled discussion over whether a larger 1 percentage point hike is warranted.
Friday's University of Michigan report, however, was the second piece of welcome news for the Fed at least on the longer-term inflation expectations front. On Monday, the New York Fed's Survey of Consumer Expectations showed consumers' three-year expectation slid to the lowest since January at 3.6%.
Measured against June's preliminary University of Michigan reading of 3.3%, issued the day after U.S. gasoline prices hit a record high above $5 a gallon, consumers' five-year inflation expectations have come down by half a percentage point in a month. In that time, gasoline prices - an influential factor in consumers' perceptions of inflation - have fallen by nearly 9%.
Overall consumer sentiment ticked slightly upward in July from June's record-low reading, the Surveys of Consumers report showed. The headline sentiment index edged up to 51.1 from 50 in June, with all of the improvement coming from a brighter view of current circumstances.
The current conditions index rose to 57.1 from 53.8, while the expectations index dipped further to 47.3 - the lowest since May 1980 - from 47.5 last month.
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