Source: Fortune.com
Summary
The University of Michigan’s consumer sentiment survey showed a record low reading, with inflation expectations rising due to the Iran war and high energy prices. The survey’s long-run inflation expectations jumped to 3.9% in May, exceeding the 2024 range of 2.8% to 3.2%. Fed Governor Chris Waller warned about the risk of unanchored inflation expectations, stating that if they become unanchored, he would support an increase in the target range for the federal funds rate.
Our Reading
The numbers tell one story. The University of Michigan’s consumer sentiment survey reveals a worrying trend in inflation expectations. Republicans’ long-term inflation expectations have more than doubled since February 2025. The Fed is concerned that persistently higher inflation could cause consumers to lose faith that it will eventually cool off. Fed Governor Chris Waller has changed his focus from jobs data to inflation, warning that a series of shocks can change consumer psychology. The Fed is watching how the conflict and data evolve before taking action.
The strategy enters a familiar phase. The Fed is caught between the risk of unanchored inflation expectations and the need to respond to short-term price shocks. The central bank is walking a fine line, trying to balance its inflation target with the uncertainty of the Iran war and its impact on energy prices.
Author: Evan Null
