US consumers are growing more concerned about the direction of the US economy due to persistent inflation and the possibility of high interest rates lasting longer than anticipated.
Consumer Concerns and Drop in Sentiment
May saw a 13% drop in overall sentiment, according to the most recent University of Michigan consumer sentiment survey, which was released on Friday.
The index reading for the month was 67.4, well below the 76.2 reading that economists had predicted. This was the lowest level in six months.
Expectations for inflation in the coming year increased from 3.2% in the previous month to 3.5% in Friday’s report. Expectations for longer-term inflation increased from 3% to 3.1% in the previous month.
Director of the study of consumers Joanne Hsu stated in a statement that “although consumers had been delaying judgment for the past few months, they now perceive negative developments on a number of dimensions.” “They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”
Challenges for the Federal Reserve
The decline in morale follows several months of data indicating that the lower trajectory of inflation hasn’t been as seamless as many economists had thought. The Federal Reserve constantly monitors the Personal Consumption Expenditures (PCE) index, which excludes the cost of food and energy, and it increased at an annualized rate of 4.4% during the first three months of this year. This reversed a pattern of considerable inflation softening to end 2023, tracking much higher than the Fed’s 2% target.
Federal Reserve Chair Jerome Powell stated on May 1, 2024 that “inflation has shown a lack of further progress toward our 2% objective in recent months, and we remain highly attentive to inflation risks.”
Although Powell stated that raising interest rates is “unlikely” to be the Fed’s next action, the sticky inflation numbers seem to have set the Fed on a course to postpone rate cuts for longer than the markets had anticipated at the beginning of the year.
Weak Economic Data Releases
A number of economic data releases have been lackluster, including the most recent jobs report, which was worse than anticipated, and data indicating a decline in manufacturing activity in April. Unexpectedly, weekly unemployment claims increased on May 8 and reached their highest point since August 2023.
The University of Michigan statement comes after the Conference Board recently released a reading of consumer confidence, which revealed that it fell to its lowest point since July 2022 in April.
Powell has spoken at length about how the central bank monitors consumer sentiment toward inflation and how it will influence inflation’s return to the 2% target.
Fed’s Criteria for Policy Adjustment
“For us to begin to reduce policy restriction, we’d want to be confident that inflation is moving sustainably down to 2%,” Powell stated on May 1. “The performance of inflation is undoubtedly one of the topics we would be examining. Incoming inflation statistics would undoubtedly be at the center of that choice, but we would also be examining inflation expectations and the complete picture.”
Next week will provide key data on consumer spending and inflation when retail sales and the Consumer Price Index for April are released, which is anticipated in mid-May.