Inflation expectations fall in July as consumer sentiment beats expectations

Consumer sentiment rose in July while inflation expectations tumbled, according to the latest data from the University of Michigan released Friday.

Preliminary data for July showed consumer sentiment rose modestly this month, to 51.1 from 50 at the end of June. Economists expected this index to come in at 50, which would match the record low seen last month.

Consumer inflation expectations also fell sharply in July, with longer term inflation expectations dropping to 2.8% from 3.1%. Inflation expectations from this report became a larger focus for investors after Federal Reserve chair Jerome Powell referenced the report during testimony with lawmakers last month.

Rising inflation expectations were, in part, what prompted the Fed to raise interest rates by 0.75% in June, the largest increase since 1994.

Following Friday's data, market pricing for an interest rate increase of 1% later this month tumbled, with traders now putting less than 30% odds on a 100 basis point increase on July 27. On Thursday morning, these odds were at one point greater than 80%.

SINTRA, PORTUGAL - JUNE 29: Journalists follow onscreen the remarks of Jerome Powell, Chair of the Federal Reserve of the United States, in the afternoon panel during the closing day of the 2022 European Central Bank Forum on Central Banking on June 29, 2022, in Sintra, Portugal. The European Central Bank hosts its annual Forum on Central Banking from 27-29 June 2022. after a two-year hiatus due to COVID-19 pandemic. This year the Forum addresses the challenges for monetary policy in a rapidly changing world. (Photo by Horacio Villalobos#Corbis/Corbis via Getty Images)
Jerome Powell, Chair of the Federal Reserve of the United States, in the afternoon panel during the closing day of the 2022 European Central Bank Forum on Central Banking on June 29, 2022, in Sintra, Portugal. (Photo by Horacio Villalobos Corbis/Corbis via Getty Images)

Still, consumer outlooks expectations for the U.S. economy remain downbeat, with the consumer expectations index in this report falling to 47.3 in July, the lowest since 1980.

"Consumer sentiment was relatively unchanged, remaining near all-time lows," said Joanne Hsu, director for the University of Michigan's survey of consumers. "Current assessments of personal finances continued to deteriorate, reaching its lowest point since 2011."

"Consumers remained in agreement over the deleterious effect of prices on their personal finances," Hsu added.

"The share of consumers blaming inflation for eroding their living standards continued its rise to 49%, matching the all-time high reached during the Great Recession. These negative views endured in the face of the recent moderation in gas prices at the pump."

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