Consumer sentiment tumbles as inflation fears surge

Consumer
sentiment
slumped
as

inflation
expectations
rose,
despite
otherwise
strong
signals
in
the
economy,
according
to
a
closely
watched
survey
released
Friday.

The

University
of
Michigan
Survey
of
Consumers
sentiment
index
for
May
posted
an
initial
reading
of
67.4
for
the
month,
down
from
77.2
in
April
and
well
off
the
Dow
Jones
consensus
call
for
76.
The
move
represented
a
one-month
decline
of
12.7%
but
a
year-over-year
gain
of
14.2%.

Along
with
the
downbeat
sentiment
measure,
the
outlook
for
inflation
across
the
one-
and
five-year
horizons
increased.

The
one-year
outlook
jumped
to
3.5%,
up
0.3
percentage
point
from
a
month
ago
to
the
highest
level
since
November.

Also,
the
five-year
outlook
rose
to
3.1%,
an
increase
of
just
0.1
percentage
point
but
reversing
a
trend
of
lower
readings
in
the
past
few
months,
also
to
the
highest
since
November.

“While
consumers
had
been
reserving
judgment
for
the
past
few
months,
they
now
perceive
negative
developments
on
a
number
of
dimensions,”
said
Joanne
Hsu,
the
survey’s
director. “They
expressed
worries
that
inflation,
unemployment
and
interest
rates
may
all
be
moving
in
an
unfavorable
direction
in
the
year
ahead.”

Other
indexes
in
the
survey
also
posted
substantial
declines:
The
current
conditions
index
fell
to
68.8,
down
more
than
10
points,
while
the
expectations
measure
fell
to
66.5,
down
9.5
points.
Both
pointed
to
monthly
drops
of
more
than
12%,
though
they
were
higher
from
a
year
ago.

The
report
comes
despite
the

stock
market
riding
a
strong
rally
and
gasoline
prices
nudging
lower,
though
still
at
elevated
levels.
Most
labor
market
signals
remain
solid,
though

jobless
claims
last
week
hit
their
highest
level
since
late
August.

“All
things
considered,
however,
the
magnitude
of
the
slump
in
confidence
is
pretty
big
and
it
isn’t
satisfactorily
explained
by”
geopolitical
factors
or
the
mid-April
stock
market
sell-off,
wrote
Paul
Ashworth,
chief
North
America
economist
at
Capital
Economics. “That
leaves
us
wondering
if
we’re
missing
something
more
worrying
going
on
with
the
consumer.”

The
inflation
readings
represent
the
biggest
pitfall
for
policymakers
as
the
Federal
Reserve
contemplates
the
near-term
path
of
monetary
policy.

“Uncertainty
about
the
inflation
path
could
suppress
consumer
spending
in
the
coming
months.
The
Fed
is
walking
a
tightrope
as
they
balance
both
mandates
of
price
stability
and
growth,”
said
Jeffrey
Roach,
chief
economist
at
LPL
Financial. “Although
it’s
not
our
base
case,
we
do
see
rising
risks
of
stagflation,
a
concern
the
markets
will
have
to
deal
with,
in
addition
to
the
impacts
from
the
presidential
election.”

At
their
meeting
last
week,

Fed
officials
indicated
they
need “greater
confidence”
that
inflation
is
moving “sustainably”
back
to
their
2%
goal
before
lowering
interest
rates.
Policymakers
consider
expectations
a
key
to
taming
inflation,
and
the
outlook
now
from
the
Michigan
survey
has
shown
consecutive
months
of
increases
after
falling
considerably
between
November
and
March
of
this
year.

Market
pricing
is
pointing
to
a
strong
expectation
that
the
Fed
will
begin
reducing
its
key
borrowing
rate
in
September
after
holding
it
at
its
highest
level
in
more
than
20
years
since
July
2023.
However,
the
outlook
has
been
in
flux
even
with
Fed
Chair

Jerome
Powell
indicating
in
his
post-meeting
news
conference
that
it
is
unlikely
the
central
bank’s
next
move
would
be
a
hike.

The
next
important
data
point
for
inflation
comes
Wednesday
when
the
Labor
Department
releases
its
consumer
price
index
report
for
April.
Most
Wall
Street
economists
expect
the
report
to
show
a
slight
moderation
in
price
pressures,
though
the
widely
followed
CPI
index
has
been
running
well
ahead
of
the
Fed’s
target,
at
3.5%
annually
in
March.