Consumer confidence has dropped to 51.0 as Americans grow increasingly cautious.
The University of Michigan's preliminary consumer sentiment index fell to 51 in August, down from 55.2 in July, and well below economists' expectations of 55. This decline ends a two-month streak of improvement in the index, driven by ongoing conflict, rising bond yields, and geopolitical uncertainty.
Both the current conditions index and the consumer expectations index also missed market forecasts: the current conditions index came in at 51.8 versus an expected 54.8, while the expectations index registered 50.6 compared to the market consensus of 55.2.
The survey's director, Joanne Hsu, noted that the decline in confidence was widespread across all demographic groups, with particularly sharp drops among older adults, low-income households, and those without a college degree, who are less able to shield themselves from the erosion of purchasing power caused by inflation.
As overall sentiment weakened, consumers' short-term inflation expectations rose again. With U.S. inflation remaining above the policy target for five years, this signal is bearish for the market. The one-year inflation outlook increased to 4.3% in August from 4.2% in July, while the five-to-ten-year long-term inflation expectation held steady at 3.3% month-over-month.
The University of Michigan survey found that only 8% of consumers believe their income growth will outpace inflation over the next year.
Economists had previously forecast one-year inflation expectations at 4.2% and long-term expectations at 3.3%, making this survey result a confirmation that only 8% of the public expects income gains to exceed price increases. The sentiment data follows the release of monthly CPI and PPI figures from the Bureau of Labor Statistics, which showed a slight moderation in price increases.
July's CPI rose 3.4% year-over-year, slightly below June's 3.5% annual rate, and increased 0.1% month-over-month. On the wholesale side, July's PPI cooled from June but still exceeded expectations; the core PPI, excluding food, energy, and trade services, rose 4.7% year-over-year, compared to the 4.6% market estimate and June's 5.1% reading.
This inflation data prompted traders to reduce their bets on a September rate hike by the Federal Reserve. After July's employment data significantly missed expectations, market expectations for a September hike were evenly split at 50-50. Current market pricing indicates an approximately 70% probability that the Fed will hold rates steady in September.
However, the market still expects the Fed to raise rates at least once more before the December Federal Open Market Committee meeting.
In another bearish data point, the Commerce Department reported on Friday that retail sales fell 0.6% month-over-month, compared to the market's expectation of a 0.1% increase. This miss continues to fuel concerns about the resilience of actual consumer demand in the U.S. economy.
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