Consumer sentiment falls to lowest level since May

The University of Michigan’s consumer sentiment index dropped unexpectedly in November to the lowest level since May as inflation concerns mounted. But the market and the Federal Reserve should be able to look through those surprises that were largely a short-lived reaction to elevated gasoline prices.

The overall sentiment index declined to 60.4 in November from 63.8 in October, according to the survey released on Friday. Inflation expectations rose sharply to 4.4% from 4.2% for the 12-month horizon, while the long-term 5- to 10-year expectations rose to 3.2% from 3.0%.

The gasoline price index in the survey also increased to its highest level since May. With oil prices plummeting in recent weeks, the disinflation trend over the past year and a half should soon push the inflation rate below 3% and toward the Fed’s target of 2%. We do not see inflation expectations staying that high next month and early next year.

There is a case to be made about the impact of the geopolitical conflict in the Middle East on consumer sentiment. We don’t think that the relatively small rebound in inflation was the entire reason for the decline in the index. Certainly, consumers could draw a similar lesson on what a conflict in a key energy-producing region can do to inflation.

But the impact on energy prices will most likely be much more limited this time around barring a larger-scale involvement of neighboring countries.

Inside the data, household finances remained solid with relatively small changes. Pressured by rising inflation expectations, households signaled less desire to purchase big-ticket items compared to October.

This article was written by Tuan Nguyen and originally appeared on 2023-11-10. Reprinted with permission from RSM US LLP.
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