Consumer sentiment hits 5-month low amid elevated inflation expectations

Consumer sentiment this month dropped to the lowest since May, according to preliminary October data in the University of Michigan survey released Friday. The decline stems from the rebound in inflation, high gasoline prices and weakened expectations due to a looming government shutdown.

More concerning is the sharp increase in inflation expectations, which should add some pressure on the Federal Reserve ahead of its November meeting.

The sentiment index fell to 63 in October from 68.1 in September. Meanwhile, the 12-month inflation expectation rose to 3.8% from 3.2%, and the 5-to-10-year expectation rose to 3.0% from 2.8%, according to the University of Michigan survey.

This bar chart shows the recent dip in consumer confidence as recorded by the University of Michigan's conumser sentiment index survey.

Clearly, rising prices at the pumps and headline CPI (consumer price index) inflation staying at 3.7% for the last two months have had a significant impact on consumers’ inflation outlook.

This is definitely not good news for the Fed as it tries to engineer a soft landing, possibly without any more rate hikes this year.

This bar chart shows the recent rise in inflation expectations as recorded by the University of Michigan's conumser sentiment index survey.

Consumers are down on most sentiment subindexes, from finances to income and job prospects. However, when asked about spending plans, survey respondents did not indicate any change in buying intentions for major items. They are down slightly for buying a new car and even less so for buying a new house.

To be clear, consumer sentiment about household balance sheets remains solid when compared to the last five years and even the next five years. That is more in line with our new estimate of excess savings: There are about $400 billion left in the economy that should be able to fuel spending and growth at least until the first quarter of 2024.

But the outlook for consumer sentiment might face more risks going forward. Geopolitical conflict in the Middle East could cause periodic volatility in oil and energy markets with varied second-order effects on domestic gasoline prices. While the conflict’s impact on energy prices remains limited at the moment, it is critical to keep monitoring the spillover effect the longer the conflict lasts.

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This article was written by Tuan Nguyen and originally appeared on 2023-10-13.
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