Consumer Sentiment Slips Again, But Inflation Outlook Improves

September 15, 2023

American consumers’ view of the economy ended the summer on a down note, as consumer sentiment edged lower for the second straight month, but their outlook improved somewhat amid falling inflation expectations.

The University of Michigan’s preliminary reading of the consumer sentiment index fell to 67.7 this month, down from August’s 69.5. Economists polled by Reuters had been forecasting a small decline to 69.1. Much of the topline decline was due to consumers’ assessment of current economic conditions, which saw a stark deterioration, falling from 75.7 in August to 69.8 this month as consumers dealt with higher gas prices.

While consumers are sour about the current state of the economy, they are getting more optimistic looking forward. “Both short-run and long-run expectations for economic conditions improved modestly this month,” according to researchers at the university.

Americans’ expectations for inflation in the year ahead fell to 3.1% in September, down from 3.5% in the prior month. That marks the lowest level since March 2021 and is only slightly above the range of expectations that researchers saw in the two years before the pandemic started. 

Meanwhile, expectations of inflation over the next five to ten years fell to 2.7%, marking only the second time in the past 26 months that long-term inflation expectations have fallen below a narrow range of 2.9-3.1%.

That is welcome news for the Federal Reserve, which is paying careful attention to Americans’ inflation expectations as it continues its fight to bring inflation down.

Consumer sentiment is also important to the broader economy, as consumption accounts for roughly 70% of the nation’s GDP. Consumer sentiment reached an all-time low last June as inflation surged and gas prices topped $5 per gallon. Compared to last year, the consumer sentiment index is 9 points higher.

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