A closely watched survey showed on Friday that despite signals of strength from the economy, consumer confidence fell as inflation expectations rose.
this University of Michigan Consumer Confidence Index Survey May’s initial reading was 67.4, down from 77.2 in April and well below the Dow Jones consensus forecast of 76.
In addition to the downbeat sentiment indicators, the one- and five-year inflation outlook also rose.
The one-year outlook jumped to 3.5%, up 0.3 percentage points from a month ago and the highest level since November.
Additionally, the five-year outlook rose to 3.1%, up just 0.1 percentage point but reversing a trend of lower readings over the past few months and reaching its highest level since November.
“While consumers have been reserving judgment over the past few months, they are now seeing negative developments on many fronts,” said Joanne Hsu, the survey’s director. “They are concerned that inflation, unemployment and interest rates may all be headed against them in the year ahead. direction of development.”
Other indices in the survey also fell sharply: the current situation index fell to 68.8, a drop of more than 10 points; the expectations index fell to 66.5, a drop of 9.5 points. Both pointed to monthly declines of more than 12%, but down from a year ago.
The report came despite strong gains in stocks and gasoline prices edging lower but still at elevated levels. Although initial jobless claims last week reached their highest level since late August, most labor market signals remained strong.
Paul Ashworth, chief economist for North America at Capital Economics, wrote, “All things considered, however, the decline in confidence is substantial and cannot be attributed to geopolitical factors or the mid-April stock market sell-off. to explain satisfactorily”. “It makes us wonder if we’re missing something that consumers are more worried about.”
Inflation data is the biggest pitfall for policymakers as the Fed considers its near-term path for monetary policy.
Jeffrey Roach, chief economist at LPL Financial, said: “Uncertainty about the path of inflation is likely to dampen consumer spending in the coming months. The Fed is walking a tightrope as it balances its dual mandate of price stability and growth. “While this Not our base case, but we do see the risk of stagflation rising, which is a concern that markets have to deal with, in addition to the impact of the presidential election. “
At last week’s meeting, Fed officials said they needed “greater confidence” that inflation would “sustainably” return to their 2% target before cutting interest rates. Policymakers believe expectations are key to curbing inflation, with the outlook in the Michigan survey showing expectations rising for months after falling sharply from November to March this year.
Market pricing points to strong expectations that the Fed will begin lowering the key borrowing rate in September, after holding it at its highest level in more than 20 years since July 2023. , the outlook is also changing all the time.
The next important inflation data point will be released on Wednesday, when the Labor Department releases its April Consumer Price Index report. Most Wall Street economists expect the report to show a slight easing in price pressures, although the widely watched CPI index has been well ahead of the Fed’s March target of 3.5%.
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