Consumer sentiment drops as inflation expectations rise
REAL ECONOMY BLOG | May 12, 2023
Authored by RSM US LLP
Consumer sentiment in April plunged to its lowest level since November as views on both current economic conditions and expectations worsened, the University of Michigan reported on Friday.
The top-line sentiment index dropped to 57.7 from 63.5 in April. The current conditions and expectations subindexes fell to 64.5 from 68.2 and to 53.4 from 60.5, respectively.
More concerning was the marked increase in long-term inflation expectations for the next five to 10 years, rising to 3.2% from 3.0% to reach their highest level since 2011.
While the long-term inflation expectations index is only one of many indexes that the Federal Reserve considers in setting policy, the unexpected rise should not be discounted, especially when gasoline prices—which often cause biases in the survey results—were not a factor in April.
The primary factor came from a plunge in confidence in the government to tame inflation, which fell to the lowest level since last summer, when year-over-year inflation peaked.
It is no secret that the Fed sees anchoring inflation expectations as its top priority as it tries to restore price stability. Friday’s data should add more reason to believe that there will be no rate cuts this year.
Inside the report, while sentiment on employment improved on the month, consumers showed more caution on big expenditures. The subindexes on plans to buy vehicles, appliances and housing all dropped on the month.
The takeaway
The consumer sentiment data further complicates the inflation picture as it points to deterioration in spending even as inflation expectations increase.
While there can be a disconnect between what consumers respond to in surveys versus what they do, the impact of sentiment is often magnified as a downturn approaches. That should serve as a reminder that sentiment is an important factor that helps determine how deep a recession will be.
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This article was written by Tuan Nguyen and originally appeared on 2023-05-12. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://realeconomy.rsmus.com/consumer-sentiment-drops-as-inflation-expectations-rise/
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