16 May COTW: Longer-Term Inflation Expectations
- The April CPI print showed headline inflation cooling to 4.9% year-over-year and 0.4% month-over-month. While this marks a significant improvement from the multi-decade high of 9.1% in June last year, it remains more than twice the Federal Reserve’s target of 2.0%. Core CPI has also barely cooled over the past five months, declining from 5.7% year-over-year in December to 5.5% in April.
- The preliminary University of Michigan survey results indicate that consumers expect prices to remain above than the Fed’s 2% target over the next 5 to 10 years, with average expectations for CPI to remain above 3%. When asked during the latest FOMC meeting in early May whether the Fed would accept a prolonged period of 3% inflation, Fed Chairman Powell clearly reiterated their goal of lowering inflation to 2%, stating, “We’re not looking to reach 3% and drop our tools. We have a goal of getting to 2%.”
- It remains to be seen if and when the Fed will succeed in achieving its 2% target, but May’s CPI figure, which will be released on June 13th (a day before the next FOMC meeting), has the potential to influence the Fed’s decision on whether to hike rates further.
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