Sentiment Improves as Inflation Loosens Grip on Consumers in August

Key Takeaways

• The Michigan Consumer Sentiment Index moved higher in the final reading for August, rebounding after four months of decline.
• Inflation expectations declined for a third month, with consumers seeing year-out price increases cooling to 2.8%.
• The survey also showed short- and long-term expectations of economic conditions hit their highest levels since April.

Consumers again said they expect price increases to ease in the near future, helping push August’s sentiment survey higher after four months of decline.

Consumer sentiment improved to a final reading of 67.9 in August, more than a point higher than the prior month, data from the University of Michigan showed. Economists surveyed by the Wall Street Journal and Dow Jones Newswires expected the reading to be slightly higher.

Survey director Joanne Hsu said the survey showed a broad improvement in consumers’ attitudes about the economy. After hitting an all-time low in the June 2022 survey, consumer sentiment has rebounded by about 36%.

Inflation Expectations Improve for Third Month

Consumers expect inflation in the next year will be 2.8%, their outlook moving lower for a third consecutive month. That optimism comes as the Personal Consumption Expenditures (PCE) report on Friday showed price pressures continued to ease in July.

Economists often say the University of Michigan survey is more sensitive to inflation. In contrast, a similar consumer confidence survey from the Conference Board touches more on changes in the labor market.

Federal Reserve officials follow consumer inflation expectations to monitor pricing trends, as price setters’ and wage payers’ reactions to these expectations can often be self-fulfilling. Declining inflation expectations could support forecasts that the Fed is prepared to begin cutting interest rates, which may start at the upcoming September meeting.

Overall, the August sentiment survey from the University of Michigan showed positive signs for the economy. Consumers’ short- and long-term economic outlook improved, with both figures reaching their most favorable levels since April 2024. This improvement was seen across age and income groups, indicating a broad-based positive sentiment.

The rebound in consumer sentiment is a welcome sign for the economy, as it indicates that consumers are feeling more confident about their financial situation and the overall state of the economy. This increased confidence can lead to higher consumer spending, which is a key driver of economic growth.

One of the factors contributing to the improvement in sentiment is the easing of inflation expectations. Consumers expect price increases to cool off in the near future, which can alleviate some of the financial pressure on households. This is supported by the recent PCE report, which showed that price pressures continued to ease in July.

The Federal Reserve closely monitors consumer inflation expectations as it helps them gauge future pricing trends. If consumers expect lower inflation, it can support forecasts that the Fed is prepared to cut interest rates. This can have a positive impact on the economy by making borrowing cheaper and stimulating investment and spending.

Overall, the August sentiment survey provides a positive outlook for the economy. With consumers feeling more optimistic about the future and inflation expectations cooling off, there is potential for increased economic activity in the coming months.

It is important to note that consumer sentiment can be influenced by various factors, including economic indicators, government policies, and global events. Therefore, it is crucial to continue monitoring consumer sentiment and its impact on the economy.

In conclusion, the August sentiment survey from the University of Michigan showed an improvement in consumer sentiment, indicating a more positive outlook for the economy. With inflation expectations cooling off and consumers feeling more confident about the future, there is potential for increased economic activity in the coming months. This is a welcome sign for the economy and can contribute to its overall growth and stability.

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