US consumers are becoming increasingly worried about the trajectory of the US economy amid sticky inflation and the prospect of high interest rates for longer than initially hoped.
The latest University of Michigan consumer sentiment survey released Friday revealed a 13% decline in overall sentiment during the month of May. The index reading for the month came in at 67.4, its lowest level in six months, and well below economist expectations for a reading of 76.2.
Year-ahead inflation expectations hit 3.5% in Friday’s report, up from 3.2% in the month prior. Longer-run inflation expectations rose to 3.1%, up from 3% the month prior.
“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions,” survey of consumers director Joanne Hsu said in a statement. “They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”
The drop in sentiment comes after several months of data showing that inflation’s downward path hasn’t been as smooth as many economists had hoped. Through the first three months of the year the core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose at an annualized pace of 4.4%. This tracked significantly higher than the Fed’s 2% goal, reversing a trend of significant easing in inflation to end 2023.
“In recent months, inflation has shown a lack of further progress toward our 2% objective, and we remain highly attentive to inflation risks,” Federal Reserve Chair Jerome Powell said on May 1.
And while Powell said it’s “unlikely” the next move for the Fed is an interest rate hike, the sticky inflation data appears to have put the Fed on a path to hold off on rate cuts longer than markets had hoped entering the year.
Meanwhile, various economic data releases have come in tepid, such as the most recent weaker-than-expected jobs report and data showing a contraction in manufacturing activity in April. On Thursday, weekly jobless claims rose unexpectedly, hitting their highest level since August 2023.
Friday’s University of Michigan release follows a recent reading of consumer confidence from the Conference Board that showed confidence in April hit its lowest level since July 2022.
Powell has talked extensively about how consumer sentiment around inflation is something the central bank watches and will play a role in inflation returning to the 2% goal.
“For us to begin to reduce policy restriction, we’d want to be confident that inflation is moving sustainably down to 2%,” Powell said on May 1. “And for sure one of the things we’d be looking at is the performance of inflation. We’d also be looking at inflation expectations, we’d be looking at the whole story, but clearly, incoming inflation data would be at the very heart of that decision.”
Crucial readings on both inflation and consumer spending will come next week with retail sales and the Consumer Price Index for April, which are expected on Wednesday.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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