A new month brought a sunnier disposition for American consumers, as the University of Michigan’s consumer sentiment index released Friday showed a 7% rise.
The overall index came in at 55.1 compared to a reading of 51.5 in July. While the current index dipped slightly, the index that measures how consumers view the future rose 16.1% from June to 54.9.
Falling inflation appears to have been a reason behind the improved outlook.
“All components of the expectations index improved this month, particularly among low and middle income consumers for whom inflation is particularly salient,” said Joanne Hsu, the survey’s director.
“The year-ahead economic outlook rose substantially to just above its average reading from the second quarter 2022, while the two other expectations index components remain at or below their second quarter averages,” Hsu added.
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Inflation expectations also improved, with the five-year reading coming in at 5%, the lowest level since February, before the Russian invasion of Ukraine and the resultant spike in energy costs.
“Still the share of consumers blaming inflation for eroding their living standards remained near 48%,” Hsu said.
Consumers drive nearly 70% of the economy, so readings of their mood can signal where the economy is and what can be expected in the future. But, consumers also sometimes say one thing and do another. Also, sentiment tends to reflect underlying political beliefs with Republicans tending to be more gloomy than Democrats since the election of President Joe Biden.
But the decline in gasoline prices – down more than a dollar per gallon in the past month or so – has begun to show up in inflation reports, including the most recent readings of the consumer and producer price indices. And that is likely to keep consumers spending for the time being. Next week will see the government report on retail sales for July, as well as data on home sales, giving a glimpse into whether consumers are still spending.
The drop in inflation has analysts predicting the Fed will only raise interest rates by 50 basis points when its monetary policy committee meets in September, rather than the 75 basis points it raised in its two previous meetings.
“Already yesterday, producer prices posted an even bigger undershoot versus expectations than the CPI the day before,” said Padhraic Garvey, ING’s regional head of research, Americas. “Headline prices fell month over month with the drop in fuel prices clearly of help. Overall the reports have helped turn around market expectations towards a 50bp hike in September and respective pricing is now only implying a 40% perceived chance of a larger 75bp hike.”