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Consumer Sentiment Plummets as Inflation Worries Jump
May 10, 2024
Sentiment among U.S. consumers slumped as inflation expectations jumped and consumers’ assessment of economic conditions soured.
The University of Michigan’s Survey of Consumers sentiment index posted an initial reading of 67.4 for May. That’s down from 77.2 in April and substantially lower than the Dow Jones consensus expectation of a reading of 76. The move represented a one-month decline of 12.7%.
Along with the downbeat sentiment reading, the survey also found higher inflation expectations, both in the short- and long-term. The one-year inflation outlook jumped to 3.5%, up 0.3 percentage point from a month ago to the highest level since November. The five-year outlook also increased to 3.1%, also the highest reading since November. While that is an increase of just 0.1 percentage point, it reverses a trend of lower readings in the past few months.
The inflation readings present a potential challenge for policymakers as the Federal Reserve contemplates the prospect of cutting interest rates. Inflation expectations can become something of a self-fulfilling prophecy as consumers, believing that prices will continue to climb, push for higher wages, which in turn drive up labor costs and fuel inflationary pressures.
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 increasing inflation expectations after falling considerably between November and March of this year.
Other indexes in the survey also posted substantial declines. The index that tracks consumers’ assessment of current economic conditions fell to 68.8, down more than 10 points, while the component that tracks expectations for the future direction of the economy fell to 66.5, down 9.5 points. Both amounted to monthly drops of more than 12%.
