Consumer sentiment in December jumped to its highest level in eight months.
And a closer look at the University of Michigan's consumer sentiment survey shows that how Americans are feeling about the economy depends on their political affiliation.
According to the survey, economic sentiment among self-identified Republicans jumped to a reading of 81.6 this month, up from a reading of 69.1 at last check and the highest level since November 2020.
Meanwhile, sentiment among Democrats tanked to a reading of 70.9 from 81.3 in November. Sentiment among Democrats hit its lowest level since September 2020.
And as the chart below shows, sentiment over the last presidential cycle has held firmly along party lines.
The political divide in how Americans are perceiving the economy isn't new, but it could be creating a quandary for the Federal Reserve.
Inflation expectations are a key part of the Fed's calculus on interest rates, with higher anticipated inflation likely pulling forward spending and lower inflation expectations seeing spending delayed.
In Friday's data release, inflation expectations for the next year rose to 2.9%, up from 2.6% the month prior and marking a six-month high.
And here again, the change was largely driven by a divergence in how Democrats and Republicans are viewing the incoming administration's economic policies.
"Throughout this month’s interviews, Democrats voiced concerns that anticipated policy changes, particularly tariff hikes, would lead to a resurgence in inflation," Survey of Consumers director Joanne Hsu said in the release.
"Republicans disagreed; they expect the next president will usher in an immense slowdown in inflation. As such, national measures of sentiment and expectations continue to reflect the collective economic experiences and observations of the American population as a whole."
Democrats see inflation rising to 3.2% in the next year while Independents see inflation hitting 2.9%. Republicans are much more optimistic, believing inflation will fall to 1.3% over the next year.
The uptick in inflation expectations comes as some Federal Reserve officials have recently acknowledged that progress toward the Fed's 2% target has stalled.
On Friday, Federal Reserve governor Michelle Bowman said during a moderated conversation at the Missouri Bankers Association Executive Management Conference that inflation is "uncomfortably" above the Fed's target.
The core Personal Consumption Expenditures (PCE) index, which strips out food and energy costs and is the Fed's preferred inflation gauge, showed prices increased 2.8% annually in October. This marked an increase from the 2.7% seen in September. The Consumer Price Index, another measure of inflation that assigns a higher weighting to housing costs, has shown core prices rise 3.3% on an annual basis for three consecutive months.
Fed Chair Jerome Powell has frequently cited consumer inflation expectations as a key part of inflation's path to the central bank's 2% target.
"We watch that very carefully, and we will not allow inflation expectations to drift upward," Powell said during a press conference after the Fed's last interest rate cut on Nov. 7. At the time, Powell described inflation expectations as "well-anchored."
"We would be concerned if we thought we saw longer-term inflation expectations anchoring at a higher level," Powell said at the time. "That’s not what we’re seeing."
For now, it looks like a political divide is beginning to change that picture for the Fed. Powell will speak again to members of the press on Dec. 18 following the Fed's final interest rate decision of the year.
source: finance.yahoo.com
