Better inflation data lifted consumer sentiment in August despite growing recession risk
Consumers remain far from optimistic but may be showing signs of stepping back from their extreme pessimism in recent months. Following its worst reading ever, better inflation data appears to be providing a degree of relief for consumers that have felt the pinch of higher prices this year.
The University of Michigan consumer sentiment index ticked up to 55.1 in August’s preliminary reading from 51.5 in the prior month. Notably, survey respondents were a bit more upbeat in their expectations, even as the one-two punch of high inflation and growing recession risk continues to sour their assessment of current conditions.
Worries around whether or not the economy is slipping into (or may even already be in) recession have risen, but still seemingly pale in comparison to the frustration created by the corrosive effects of inflation on household spending.
For consumers, a recession still seemingly represents a “what-could-happen” type of risk despite some softening in employment conditions. By comparison, inflation represents a clear and present danger that they have been feeling every day, pinching household budgets.
Recent reports on consumer and producer prices provide some glimmer of hope that those pressures may be easing. The sharp retreat in gasoline prices over the past month may be the most noticeable positive development for consumers. Still, the continued rise in the cost of shelter — and even more notably food — suggest that it’s still far too early to conclude that the worst is behind us.
Despite generational highs in inflation gauges, consumers remain surprisingly measured in their inflation expectations. The long-run expectation of 3% may be above what had been the inflationary norm over the course of the decade leading up to the pandemic, but still suggests a good degree of confidence that the current bout of excessive inflation is an anomaly. That’s good news for the Fed, suggesting that they haven’t lost credibility with consumers and the combination of policy tightening and a strong anti-inflation message is keeping long-term expectations in check.
The bottom line? The one-two punch of inflation and recession risk continue to weigh heavily on the collective consumer mood. Still, the sharp decline in gas prices and solid labor market conditions appear to be enough to ease the degree of pessimism about the future.