While actual US CPI continues to ease and the October reading was better than expected, US consumers’ inflation expectations, both for the short term and long term, rose more than initially estimated in November.

The University of Michigan’s consumer sentiment survey showed American consumers expect prices to climb at an annual rate of 4.5% over the next year, up from the 4.2% expected in October and 3.2% in September. This marks the highest one-year reading since April 2023. Over the next five to ten years, consumers see costs rising at an average rate of 3.2% (October: 3.0%; September 2.8%), the highest forecast since 2011.


The University of Michigan release noted that “consumers appear worried that the softening of inflation could reverse in the months and years ahead.”


Any persistent move up in inflation expectations could become a cause for concern for the Federal Reserve given that the central bank remains data dependent. As noted in the Federal Open Market Committee's (FOMC) 31 October—1 November meeting minutes, the Federal Reserve is closely watching inflation pressures and inflation expectations along with labor market conditions and financial and international developments in assessing the appropriate policy stance.


In our view, the Federal Reserve will continue to be cautious and keep policy restrictive in the near term. But as growth slows and inflation cools, our base case is for the FOMC to begin cutting rates in the spring or summer, with two or three cuts likely by the end of 2024.


Having said that, we do not expect the path of decelerating US growth and inflation to be smooth. We are also mindful of the unusually wide range of risks that could still spoil the outlook. The wars between Russia and Ukraine and between Israel and Hamas both have the potential to trigger volatility in the event of escalation and push oil prices above USD120/bbl. This could spark an uptick in price pressures again.


From an investment perspective, given the uncertainties and non-negligible risks of renewed volatility across markets and economic data, we recommend investors look for quality across asset classes.


In fixed income, we think this is an opportune time to add to high-quality bonds—specifically high grade (government) and investment grade. Current yields should provide attractive returns, with positive returns possible across a range of scenarios, and particularly in downside economic scenarios. We see value particularly the 5-year duration point.


In equities, quality companies with strong balance sheets and high profitability, including those in the technology sector, appear best positioned to generate earnings in an environment of weaker growth.


Lastly, in order to hedge market risks investors should consider using capital preservation strategies, using alternatives, or with positions in oil and gold.