Consumer sentiment eased as inflation expectations rose, despite otherwise strong economic signals, according to a closely watched survey released on Friday.
The University of Michigan Consumer Survey Sentiment Index for May posted an initial reading of 67.4 for the month, up from 77.2 in April and well ahead of the Dow Jones consensus of 76. The move represented a 12.7% month-over-month decline but a 14.2% gain on an annual basis .
Along with the measure of negative sentiment, the outlook for inflation at the one- and five-year horizons rose.
One-year prospects jumped to 3.5%, up 0.3 percentage points from the previous month to the highest level since November.
Also, the five-year outlook rose to 3.1%, up just 0.1 percentage point but reversing a trend of lower readings in recent months, also to the highest since November.
“While consumers have been reticent to judge in recent months, they are now perceiving negative developments across a number of dimensions,” said Joanne Hsu, director of the survey. “They expressed concerns that inflation, unemployment and interest rates could all move in an unfavorable direction next year.”
Other survey indicators also saw significant declines: The current conditions index fell to 68.8, down more than 10 points, while the expectations index fell to 66.5, down 9.5 points. Both pointed to monthly declines of more than 12%, although they were higher than a year ago.
The report comes despite the stock market rallying strongly and gasoline prices easing, though remaining high. Most labor market signals remain steady, although jobless claims last week hit their highest level since late August.
“All things considered, however, the size of the drop in confidence is quite large and is not satisfactorily explained by” geopolitical factors or the stock market sell-off in mid-April, wrote Paul Ashworth, chief North American economist at Capital Economics. . “That leaves us wondering if we’re missing something more troubling with the consumer.”
Inflation measures represent the biggest pitfall for policymakers as the Federal Reserve considers the short-term path of monetary policy.
“Uncertainty about the path of inflation could suppress consumer spending in the coming months. The Fed is walking a tightrope as they balance both their mandates of price stability and growth,” said Jeffrey Roach, chief economist at LPL Financial. “While not our key case, we see rising risks of stagnant inflation, a concern that markets will need to address, in addition to the fallout from the presidential election.”
At their meeting last week, Fed officials said they needed “greater confidence” that inflation is returning “sustainably” to the 2% target before cutting rates. Policymakers see expectations as key to curbing inflation, and the outlook now from the Michigan survey points to consecutive months of increases after falling significantly between November and March this year.
Market prices indicate a strong expectation that the Fed will start cutting its key lending rate in September after keeping it at a 20-year high until July 2023. But the outlook was in flux even with the chairman of the Fed Jerome Powell stating at the press conference after the meeting that it is unlikely that the central bank’s next move will be a hike.
The next major inflation data point comes on Wednesday, when the Labor Department releases its April consumer price index report. Most Wall Street economists expect the report to show a slight moderation in price pressures, although the widely followed CPI was well ahead of the Fed’s target of 3.5 percent annually in March.