Consumer fears about inflation eased in December due to falling energy prices and the impact of rising interest rates.
In the latest University of Michigan consumer sentiment survey released Friday, the one-year outlook for the inflation rate fell to 3.1%, down sharply from 4.5% in November and the lowest since March 2021. The five-year outlook also moved lower, down from 3.2% last month to 2.8%.
Federal Reserve officials see consumer expectations as key to how inflation rises, so a change in sentiment could convince policymakers to keep interest rates on hold and possibly begin cutting in 2024. The University of Michigan survey is one of the more closely watched gauges.
Inflation sentiment in turn is closely linked to the direction of energy costs and prices, particularly at the pump. According to AAA, the price of a gallon of unleaded gas has fallen 22 cents to $3.18 in the past month.
The combination of a benign inflation outlook and a solid November jobs report helped lift stocks in early trading. Treasury yields also jumped, although they remained below session highs.
To be sure, inflation expectations are volatile; The one-year outlook stood at 3.2% in September before jumping higher in October and November.
The Fed is trying to reduce inflation through a series of 11 interest rate hikes starting in March 2022. Together, the hike took the central bank’s benchmark lending rate by 5.25 percentage points to its highest level in more than 22 years. Central bankers believe the impact of rate hikes is slow and are hesitant to declare victory because of the impact of policy tightening on the economy.
Consumer sentiment also generally bounced back in December. The University of Michigan index of consumer sentiment rose more than 8 points to 69.4, the best level since July. The current situation index rose nearly 6 points to a reading of 74, while the expectations index rose nearly 10 points to 66.4.
A report from the Labor Department earlier in the day showed nonfarm payrolls rose by 199,000 in November, better than the estimate of 190,000. The unemployment rate fell to 3.7%.