Consumer Sentiment and Inflation Expectations Treading Water in August

Consumer sentiment in early August has not improved from the prior month despite lower unemployment and economists downgrading the odds of a recession in the near-term.

The University of Michigan’s consumer sentiment index fell by 0.6 percent, as a decline in the expectations index was mostly offset by an improvement in the assessment of current conditions.

Compared with a year ago, the index is up a sharp 22 percent. It has shown substantial improvement over the past three months as the economy has continued to grow and economists have revised their view that a recession loomed in the near future. Many forecasters now say a recession will not hit until next year or that the economy could avoid a recession altogether.

“Consumer sentiment was essentially unchanged from July, with small offsetting increases and decreases within the index,” said Joanne Hsu, the director of the survey. “At 71.2 index points, sentiment is now about 42% above the all-time historic low reached in June of 2022 and is approaching the historical average reading of 86. In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago.”

Expectations for inflation in the year ahead ticked down from 3.4 percent last month to 3.3 percent this month, which Hsu described as “showing remarkable stability for three consecutive months.”

That is above the 2.3 percent to three percent range seen int he two years prior to the pandemic. The latest forecast indicates that the recent declines in inflation are not expected to continue.

Long-run expectations were stable at 2.9 percent. They have remained in a narrow range of 2.9 percent to 3.1 percent for 24 out of the last 25 months, which is well above the prepandemic range of 2.2 percent to 2.6 percent. This highlights the challenge facing the Fed as it tries to bring inflation down to its two percent target and suggests that the economy may have already hit peak disinflation.