The University of Michigan reports that consumer sentiment has dropped to its lowest point in four months, with personal financial outlooks declining by approximately 10% due to growing inflation concerns. Households’ views of near-term business conditions have worsened, influenced by rising fuel costs and renewed U.S. trade tensions.
Expectations for inflation over the short and long term have risen, according to Joanne Hsu, the university’s director of consumer surveys, who noted that interviews show widespread agreement across the political spectrum that the economic outlook has weakened since the start of the year.
Since January, sentiments among Republicans and Democrats have sagged 20% and 13%, respectively, Hsu said. Despite their dimming sentiments, consumers have shown no sign of cutting spending, with retail sales jumping a higher-than-forecast 1.2% in August on a month-over-month basis.
Retail sales climbed 6% compared to the same period last year, based on data from the Census Bureau. In the segments monitored by Retail Dive, sales increased by almost 7% year over year in August, with significant gains from e-commerce, electronics, and sporting goods.
After a slow start to the year, real consumption growth accelerated to an annualized rate of 3.4% in the second quarter, Paulson said.
Price pressures may have prompted consumers to spend now rather than see their buying power wane further in coming months, Hsu said. Expectations for inflation in a year rose this month to 4.6% from 4% in August, Hsu said, exceeding the range of 2.8% to 3.2% during 2024.
Consumer long-run inflation expectations rose to 3.4% from 3.3% in August, according to Hsu. On Sept. 16, Fed policymakers raised the federal funds rate to a range of 3.75% to 4%, marking their first tightening in three years, while highlighting persistent price pressures.
Beth Hammack, Cleveland Fed President, noted that “the inflation outlook continues to be highly uncertain, with risks tilted to the upside.” Paulson voiced zero tolerance for above-target inflation, saying “let me be clear: returning inflation to 2% is nonnegotiable, and I will support the policy path that gets us there while carefully weighing risks to the labor market along the way.”