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Inflation expectations plunge in closely watched University of Michigan survey

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Consumer fears over inflation tumbled in December amid declining energy prices and as the impact of interest rate hikes take hold.

In the latest University of Michigan consumer sentiment survey released Friday, the one-year outlook for the inflation rate slid to 3.1%, down sharply from 4.5% in November and the lowest since March 2021. The five-year outlook also moved lower, down to 2.8% from 3.2% the previous month.

Federal Reserve officials consider consumer expectations a key in the way inflation moves, so the switch in sentiment could further convince policymakers to keep interest rates on hold and possibly start cutting in 2024. The University of Michigan survey is one of the more closely watched gauges.

Inflation sentiment in turn is tied closely to the direction of energy costs and prices at the pump in particular. The price of a gallon of unleaded gas has fallen 22 cents to $3.18 over the past month, according to AAA.

The combination of a benign inflation outlook and a solid November jobs report helped push stocks higher in early trading. Treasury yields also jumped, though they moved off session highs.

To be sure, inflation expectations are volatile; the one-year outlook was at 3.2% in September before leaping higher in October and November.

The Fed has been seeking to tamp down inflation through a series of 11 interest rate hikes that started in March 2022. Together, the increases have taken the central bank’s benchmark borrowing rate up 5.25 percentage points to its highest level in more than 22 years. Central bankers believe rate hikes work with a lagged effect and have been hesitant to declare victory as the policy tightening works its way through the economy.

Consumer optimism also jumped higher in December. The University of Michigan index of consumer sentiment index rose more than 8 points to 69.4, tied for the best level since July. The current conditions index registered a reading of 74, up nearly 6 points, while the expectations index surged almost 10 points to 66.4.

A Labor Department report earlier in the day showed that nonfarm payrolls expanded by 199,000 in November, better than the estimate for 190,000. The unemployment rate fell to 3.7%.

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