Lower Inflation Has Consumers Feeling Better About the Economy

Key Takeaways

• The Michigan Consumer Sentiment Index improved in August, its first increase in five months.
• Economists said the increase could be attributed to people finally feeling relief from high inflation.
• Consumers said they felt better about the economic outlook but soured on the current conditions.

Consumers are finally feeling some relief from price pressures. The University of Michigan’s Index of Consumer Sentiment improved to 67.8 in August, rising for the first time in five months. Recent reports have shown slowing inflation as annual price increases move back toward the Federal Reserve’s target of 2%.

“Recent encouraging developments toward bringing inflation back into the FOMC’s target range have given consumers reason to be a bit more optimistic,” wrote Wells Fargo economists Tim Quinlan and Jeremiah Kohl. The Federal Open Market Committee (FOMC) is the Fed’s policy-setting body, and it has kept interest rates at two-decade highs in an effort to tame inflation.

The University of Michigan poll is more sensitive to inflation readings when compared with other consumer surveys. For that reason, readings have been dour over the past year as inflation remained stubborn.

Consumers expect inflation to be 2.9% a year from now, in line with their predictions last month. Fed officials closely monitor consumer inflation expectations since people act on those predictions, which can influence both price setters and wage payers.

Future Economic Expectations Move Higher

Consumers reported feeling better about the economic outlook but souring on the current conditions.

“Overall, expectations strengthened for both personal finances and the five-year economic outlook, which reached its highest reading in four months,” said Joanne Hsu, director of the University of Michigan’s Survey of Consumers.

Lower inflation has played a significant role in improving consumer sentiment. As prices stabilize and move closer to the Federal Reserve’s target, consumers are feeling more optimistic about their financial future. This positive shift in sentiment is reflected in the recent increase in the Michigan Consumer Sentiment Index.

The Federal Reserve has been closely monitoring inflation and has taken steps to keep interest rates high to combat rising prices. The efforts to tame inflation seem to be paying off, as recent reports have shown a slowdown in inflationary pressures.

The University of Michigan’s Index of Consumer Sentiment is particularly sensitive to inflation readings. Over the past year, as inflation remained stubbornly high, consumer sentiment has been negative. However, with recent signs of improvement in inflation, consumers are starting to feel relief from the price pressures they have been facing.

Consumer expectations for inflation have remained steady, with consumers predicting inflation to be 2.9% a year from now. This consistency in expectations indicates that consumers are starting to regain confidence in the stability of prices.

While consumers are feeling more positive about the economic outlook, their sentiment towards current conditions has soured. This could be attributed to the lingering effects of high inflation and the challenges consumers have faced in the current economic climate.

Despite the mixed sentiment towards current conditions, consumers are hopeful about their personal finances and the long-term economic outlook. This optimism is reflected in the highest reading for the five-year economic outlook in four months.

In conclusion, lower inflation has had a positive impact on consumer sentiment. As prices stabilize and move towards the Federal Reserve’s target, consumers are feeling more optimistic about the economy. While sentiment towards current conditions may still be negative, consumers are hopeful about their personal finances and the future economic outlook. This shift in sentiment is a promising sign for the overall health of the economy.

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