Consumer inflation expectations eased and sentiment rose in…

Preliminary results for September from University of Michigan consumer surveys show that general consumer confidence rose in early September but remains at historically low levels (see first chart). The Composite Consumer Confidence Index rose to 59.5 in early September, up from 58.2 in August. The index hit a record low of 50.0 in June down from 101.0 in February 2020 at the start of the shutdown recession. The total increase in early September was 1.3 points, or 2.2 percent. The indicator remains consistent with previous recession levels.

The Current Economic Conditions Index rose to 58.9 from 58.6 in August (see first chart). This is a 0.3 point or 0.5 percent increase for the month. This component is a few pips above the June low of 53.8 and is still consistent with previous recessions.

The second component – consumer expectations, one of AIER’s leading indicators – gained 1.9 points, or 3.3 percent, for the month, rising to 59.9. This component indicator showed the strongest rebound in the past two months but is still consistent with previous stagnation levels (see first chart). According to the report, “One-year economic outlook continued to rise from very low readings earlier in the summer, but these gains were largely offset by modest declines in the longer-term outlook.” The report adds, “Personal finance components of the index as well as terms of purchase of durable goods remained at similar and relatively lower levels than last month.” The report further notes, “After a marked improvement in sentiment in August, consumers are showing signs of uncertainty over the course of the economy.”

One-year inflation expectations slipped again in early September, falling to 4.6 percent. This is the fourth decline in the past five months since consecutive readings of 5.4 percent in March and April. The latest reading is the lowest since September 2021 (see second chart).

Five-year inflation expectations have also softened, reaching 2.8% in early September. This result is within the 25-year range of 2.2% to 3.5% and is the lowest reading since July 2021 (see second graph).

The report states, “With continuing declines in energy prices, the average rate of inflation for the next year forecast has fallen to 4.6%, the lowest reading since last September. At 2.8%, the average long-term inflation expectations have fallen below the 2.9-range 3.1% for the first time since July 2021.”

The report adds: “However, it is not clear whether these improvements will be sustained, as consumers continue to display a great deal of uncertainty about the future course of prices. Uncertainty about short-term inflation has reached levels last seen in 1982, Uncertainty about long-term inflation rose from 3.9 to 4.5 this month, well above the 3.4 level we saw last September.”

Pessimistic consumer attitudes reflect the confluence of events with inflation driving the package. Consistently high rates of price increases affect consumer and business decision-making and distort economic activity. Overall, economic risks remain elevated due to the impact of inflation, the severe Fed tightening cycle, and the ongoing fallout from Russia’s invasion of Ukraine. With the midterm elections approaching, an escalation of negative political advertising may affect consumer confidence in the coming months. Economic prospects remain highly uncertain. Caution is required.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after more than 25 years researching financial and economic markets on Wall Street. Previously, Bob was Head of Global Equity Strategy for Brown Brothers Harriman, where he developed an equity investment strategy that combines top-down macro analysis with upward fundamentals.

Prior to BBH, Bob was Chief Equity Analyst at State Street Global Markets, Chief Economist at Prudential Equity Group and Chief Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business Administration from Lehigh University.

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