Consumer sentiment stabilizes, inflation expectations rise

Preliminary results show that the University of Michigan’s consumer sentiment survey increased from 67.7 in October to 69.3 in November, just ahead of the Bloomberg estimate of 69.0. Notably, short-term inflation expectations jumped, but more about that in a moment.



Consumer sentiment, which took a beating when the already fragile and uneven recovery slowed during the summer, has stabilized and is beginning to inch higher amid a very modest acceleration in economy activity over the past couple of months.

The modest drop in weekly jobless claims is alleviating some of the anxiety about potential layoffs, while the private sector has created over 100,000 jobs per month in each of the last four months.

Still, the job creation remains below the 150,000 needed to bring down the unemployment rate, and without a noticeable pickup in the labor market, consumer confidence will likely remain depressed and hold back spending among the nation’s consumers.

Rising inflation expectations - keeping the genie in the bottle
So far just the talk in September and October that the Fed might initiate a new round of bond purchases, coupled with the green light the Fed gave in November, has reversed the drop in inflation expectations – at least over the short term.

According the the University of Michigan’s survey, consumers now anticipate that prices will rise 3.0% over the next 12 month, up from 2.7% last month and a paltry 2.2% in September.  Longer-term the 5-year outlook held steady at 2.8%.

Oil prices have jumped over the past two months, with the price approaching $90 per barrel, gold has soared above $1,400 per ounce, while the key industrial metal copper has returned to the highs reached in 2008.

It’s clear that rising demand around the world, especially in China and other emerging market economies, has supported prices.

But rising speculation created by the second round of quantitative easing that was just initiated by the Fed is producing a run up in commodity prices.  And consumers have not turned a blind eye to what’s going on, lifting their view as to what may happen to prices over the next year.

The Fed can do little to contain commodity inflation, given current monetary policy and global demand for raw materials. But it must remain vigilant in its efforts to anchor inflation expectations.