A Holly Jolly Inflation OutlookLast Friday's University of Michigan Survey of Consumers revealed some surprising bullish trends as we head into the heart of the holiday season. November’s 69.4 sentiment score, the highest since August, was a massive jump from 61.3 in October, making a positive change in how consumers feel about the state of the economy. Within the report, though, is what really raised eyebrows on trading desks to wrap up last week.
My chart of the week is UMich 1-year inflation expectations. At 3.1%, it was the softest outlook for inflation since March 2021 and the biggest monthly drop since 2001. The stunning reversal comes amid rapidly falling gasoline prices. Bigger picture, the 5-year inflation outlook also came in tame at just 2.8%, tying for the lowest figure since July 2021.
It’s all music to the Fed’s ears ahead of this week’s key December FOMC meeting. Bond traders widely expect no change in the policy rate, but households’ collective outlook for lower inflation means they could be less aggressive in asking for significant wage increases in the new year, thus squashing the chance of a wage-price inflation spiral to take place in the coming quarters.
What does it mean for investors? It is yet another sign that inflation should continue its downward trajectory. Headline CPI is seen printing 0.0% for November, following October’s goose egg, while core prices are forecast to have risen by 0.3% last month. I assert this good news should help get the usually bullish back half of the December period off to a strong start, and the Santa Claus Rally period (the last five trading days of the year followed by the first two sessions of the new year) appear on track for gains.
