Americans feel a little better, and expect less inflation

What happened

The University of Michigan's index of US consumer sentiment rose to 51.0 in its preliminary November reading, published on 6 November, from 48.0 in October. Economists had expected no change. Both parts of the index improved: views of current conditions rose to 51.0 from 46.7, and expectations to 50.9 from 48.8. Sentiment is still about 10% below its level in February, before the oil shock.

The inflation households expect also eased. Over the next year, they expect prices to rise 4.3%, down from 4.7% in October and the lowest since August. Over the long run, five to ten years ahead, they expect 3.4%, down from 3.5%. In February, year-ahead expectations were 3.4%.

Why expectations matter

Inflation is partly self-fulfilling. If workers expect prices to rise 4% next year, they ask for bigger pay rises; if firms expect their costs to rise, they raise prices sooner. Both make the expected inflation more likely to happen. That is why central banks watch surveys like this one closely, especially the long-run measure: a rise there would suggest people have stopped believing inflation will return to target.

Two weeks ago, these expectations were at a five-month high (our story). The fall in oil prices may have helped: fuel is the price households see most often, and it shapes what they expect.

What it means for the Fed

For the Federal Reserve, it is a mixed week. October's jobs report was strong, with 165,000 new jobs, which argues for a rate rise in December. Easing inflation expectations argue for patience. Long-run expectations of 3.4% are still well above the 2% target, and above the 2.8% to 3.2% range seen in 2024.

Where it sits in the chain

This is Link 3, expectations. What households expect about inflation shapes what they do, and what the central bank believes it must do.

What to watch

• The final November reading later this month.
• US inflation for October, due in mid-November.
• Petrol prices, if oil stays below $100.