Late yesterday, the most recent University of Michigan’s 5-year inflation-expectations gauge was released. This particular metric depicts the US consumers’ prediction of the average inflation rate over the next 5 years. It came in at 2.8% for July – still higher than pre-pandemic (ranged from 2.2% to 2.6% from July 2017 through March of 2020) but lower than June’s final 3.1%. As you can see by the chart below, this is a significant drop and is the lowest number since July of 2021. Also, any revision to July’s 2.8% would not likely happen until after the Fed’s July rate decision, if it is revised at all.
This trend could be significant in predicting the Fed’s July rate hike, as multiple sources have stated that the initial June report is mainly what motivated the Fed to go outside the norm and hike rates by 100 basis points versus the initially planned 75-basis-point hike. Obviously, this new trend paints a much more optimistic picture, which could be sufficient to get a 100-basis-point hike off the table. It appears that such is what Wall Street reacted to via yesterday’s big rally despite it otherwise being a dismal week. I am not surprised by Wall Street’s favorable reaction because the Fed has taken the University of Michigan inflation expectation metrics seriously since the 1940s.
However, despite these and possibly some other tables turning toward a 75-basis-point increase, my bias remains toward 100 basis-points, simply because of the shocking June CPI of 9.1 versus May’s 8.6 CPI . As Jerome Powell stated himself, we must see a decided downward inflation trend before we should back off on aggressive money tightening. Although the prognosis might look more encouraging than it did a few days ago, we’re just not there yet in terms of actual realized inflation data. Please see my prior post for more information on why I tend to favor 100 basis points. And please know that this is only my preference from my vantage point, not a prediction of what the Fed will actually decide to do come July 26.