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Rising gas prices are often a cause for concern among consumers, typically signaling the looming shadow of inflation. However, recent findings from the University of Michigan suggest that Americans remain optimistic, largely unperturbed by the current gas price trend.
A Promising Downward Trend in Inflation Expectations
The University of Michigan's latest consumer sentiment survey, released last Friday, shed light on an interesting phenomenon. The survey reported that Americans' expectations of inflation rates for the upcoming year fell to 3.1% in September, a significant drop from the 3.5% recorded in the previous month.
This decline marks the lowest expectation since March 2021. Moreover, it hovers just above the 2.3-3.0% range seen in the two years before the pandemic hit, as highlighted in the university's statement. Further adding to this optimism, the longer-term inflation expectations, spanning the next five to 10 years, also showed a decrease.
These expectations settled at a 2.7% rate, slipping below the narrow 2.9-3.1% range for only the second time in the past 26 months.
Analyst Insight: A Step Towards Normalcy
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, hailed this decline in inflation expectations as a significant stride towards economic normalcy.
In an analyst note, Shepherdson wrote, “The drop in five-to-10-year inflation expectations … is a seriously welcome development”. He continued, “We have argued for some time that a clear downshift in inflation expectations was overdue, and this decline is a big step towards normalisation”.
However, Shepherdson also provided a note of caution, stating that this latest reading is preliminary and could see an upward revision once people react to the continuing rise in gas prices.
Gas Prices and Consumer Sentiment
It's undeniable that gas prices serve as a barometer for inflation, often directly influencing consumer sentiment.
This was notably observed last summer when sentiment plummeted to record lows as gas prices exceeded $5 a gallon. Additionally, inflation soared to a peak not seen in four decades. On Friday, the national average for regular gasoline was priced at $3.87 a gallon, according to AAA. This is an increment of seven cents from just a week prior and 17 cents higher than the same day the previous year.