All of a sudden, Wall Street is hyper-focused on inflation expectations, and an indicator from the University of Michigan with its roots in the 1940s, for clues as to how the Federal Reserve will try to manage the economy and fight inflation that's running at a more than 40-year high.
The Fed can't do anything about past price increases shown in the monthly consumer price index issued by the Department of Labor. Instead, it closely studies consumer attitudes toward future inflation.
What's grabbing the Fed's attention now, and by extension investors', is the part of the Michigan survey that measures today's outlook on expected price gains. Do consumers expect prices to run colder, hotter or about the same over the next year and over the next five years?
Unfortunately for central bankers, those numbers haven't been moving in their favor, let alone close to the Fed's 2% inflation target goal.
The preliminary June Michigan survey reported last Friday, shortly after May's CPI was released, showed households now expect inflation to run at a 5.4% annual rate over the next year — up from 4.2% one year ago — and 3.3% annually over the next five years, up from 2.8% in June 2021.
Fed Chair Jerome Powell said at his news conference Wednesday, after the Fed's 0.75 percentage point interest rate boost, that the Michigan survey helped push the central bank away from a 0.5-point increase that had been expected only last week.
The June numbers reported Friday were "quite eye-catching and we noticed that," Powell said. Inflation expectations among Fed policymakers themselves "moved up after being pretty flat for a long time. So we're watching that, and we're thinking this is something we need to take seriously."
In the parlance of the Fed, the risk now is that price expectations come loose, or lose their "anchor." Fed governors "are absolutely determined to keep them anchored at 2%," Powell said Wednesday.
Expected change in inflation rates
| DATE OF SURVEY | NEXT YEAR | NEXT 5 YEARS | |
| June | 2021 | 4.2 | 2.8 |
| July | 2021 | 4.7 | 2.8 |
| August | 2021 | 4.6 | 2.9 |
| September | 2021 | 4.6 | 3.0 |
| October | 2021 | 4.8 | 2.9 |
| November | 2021 | 4.9 | 3.0 |
| December | 2021 | 4.8 | 2.9 |
| January | 2022 | 4.9 | 3.1 |
| February | 2022 | 4.9 | 3.0 |
| March | 2022 | 5.4 | 3.0 |
| April | 2022 | 5.4 | 3.0 |
| May | 2022 | 5.3 | 3.0 |
| June | 2022 | 5.4 | 3.3 |
Source: Survey of Consumers, University of Michigan
Morgan Stanley economists led by Ellen Zentner said Thursday that although the Fed is fixed on inflation expectations, "inflation optics will likely worsen in coming months." The bank says consumer prices "will make a new peak in August," noting that those numbers won't be reported until September.
Arguably worse, according to Morgan Stanley, is that consumers' five-year inflation outlook might creep up to 3.8% annually by the end of 2022, from the 3.3% that Michigan just reported. That would be the highest since 1993 and is the exact opposite of what the Fed wants.
The Michigan Consumer Sentiment Index comes out twice each month after the school interviews at least 500 households, once in a preliminary reading and then, two weeks later, in final form.
The final Michigan reading this month comes out June 24 — two days after Powell presents his Monetary Policy Report to the Senate Banking Committee on Capitol Hill.
