Consumer sentiment fell as inflation expectations rose, despite strong signals in the economy, according to a closely watched survey published on Friday.
The University of Michigan Survey of Consumer Confidence Index for May posted a preliminary reading of 67.4 for the month, down from 77.2 in April and far from the Dow Jones forecast of 76. The move represented a one-month decline of 12.7% but an annual gain of 14.2%.
Along with the pessimistic sentiment gauge, inflation expectations increased across one- and five-year horizons.
The one-year forecast jumped to 3.5%, up 0.3 percentage points from last month to reach the highest level since November.
The five-year forecast also rose to 3.1%, an increase of just 0.1 percentage point, but reversing the trend of lower readings in the past few months, which also reached their highest levels since November.
“While consumers have been reserving their judgment over the past few months, they now see negative developments on a number of dimensions,” said Joan Hsu, director of the survey. “They expressed concerns that inflation, unemployment and interest rates may all move in an unfavorable direction next year.”
Other indicators in the survey also recorded significant declines: the current conditions index fell to 68.8, down more than 10 points, while the expectations scale fell to 66.5, down 9.5 points. Both indicated monthly declines of more than 12%, although these were higher than last year.
The report comes despite the stock market rising strongly and gasoline prices falling, although they are still at high levels. Most labor market signals remain strong, although unemployment claims last week reached their highest level since late August.
“All things considered, the magnitude of the decline in confidence is too large to be satisfactorily explained” by “geopolitics or the stock market sell-off in mid-April,” wrote Paul Ashworth, chief North America economist at Capital Economics. . “This leaves us wondering if we are missing something that is more concerning with the consumer.”
Inflation readings represent the biggest dilemma for policymakers as the Fed considers the near-term path of monetary policy.
“Uncertainty about the path of inflation could dampen consumer spending in the coming months,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed is walking a tightrope as it balances price stability and growth.” “Although this is not our base case, we see increasing risks of stagflation, a concern that markets will have to contend with, in addition to the effects of the presidential election.”
At their meeting last week, Fed officials indicated they needed “greater confidence” that inflation was moving “sustainably” to its 2% target before cutting interest rates. Policymakers consider expectations key to taming inflation, and forecasts from the Michigan survey have now shown increases for consecutive months after falling significantly between November and March of this year.
Market prices indicate strong expectations that the Fed will begin cutting its key borrowing rate in September after holding it at its highest level in more than 20 years since July 2023. However, expectations have been in flux even with the Fed chair Jerome Powell. Pointing out in his press conference after the meeting that it is unlikely that the next step for the central bank will be to raise interest rates.
The next important data point for inflation comes on Wednesday when the Labor Department publishes the April Consumer Price Index report. Most Wall Street economists expect the report to show a slight moderation in price pressures, even though the widely followed Consumer Price Index was well ahead of the Fed's target, at 3.5% annually in March.
