WSJ: U.S. Consumer Sentiment Improved in August From Early Summer Low

Graph from article, and link to article. A TL;DR can also be found here.

U.S. consumer sentiment rose in early August, continuing its climb from a record low earlier this summer as inflation expectations improved.

The preliminary August estimate of the University of Michigan consumer sentiment index, which surveys consumer attitudes on the state of the economy, rose 3.6 index points to 55.1 [vs. FactSet consensus estimate of 52.3] from a July reading of 51.5. Consumer sentiment has increased since dropping to 50 in June—the lowest reading on records dating back to 1952.

Future inflation expectations improved but remained elevated, according to the report. The median expected year-ahead inflation rate fell to 5%, the lowest since February. And median long-run inflation expectations held steady at 3%, a rate above inflation ahead of the pandemic.

A significant portion of consumers, near 48%, continue to blame inflation for eroding living standards. Higher-income people, for example, said household finances were down and that they had less to spend on big-ticket items.

U.S. consumer inflation remained close to a four-decade high in July but eased slightly to an 8.5% annual pace, a modest slowdown driven by a decline in energy prices that was led by a steep decline in gasoline prices.

“The slowdown in inflation is probably constructive for consumer sentiment,” said Aditya Bhave, U.S. and global economist at Bank of America.

Prices for gasoline and food, compared with other expenses, can have a disproportionate effect on inflation expectations because consumers spend on these categories more frequently, Mr. Bhave said. The average price of a gallon of unleaded gasoline in the U.S. this week fell below $4 in August for the first time since March.

“Lower prices at the pump, combined with potential cresting in annual inflation measures, should allow sentiment to gradually ascend in the months ahead from its record low set in June,” Mahir Rasheed, U.S. economist at Oxford Economics, said in an analyst note.
Gasoline prices can have a disproportionate effect on inflation expectations, which eased in the latest University of Michigan survey.

The University of Michigan report joined a Federal Reserve Bank of New York survey released Monday showing that inflation expectations fell in July. The Fed believes that expectations influence inflation’s future path as workers demand raises to offset inflation and businesses feel more comfortable raising prices.

Despite low levels of sentiment, households have continued to spend solidly, a disconnect that Mr. Bhave said should eventually resolve. “At some point, that’s got to resolve and I think the popular view is that eventually spending will slow down in line with sentiment,” he said.

Retail sales rose 1% in June, as shoppers weathered higher prices for goods that rose in price, including groceries and furniture. Consumers also spent more at restaurants.

The Commerce Department is set to release July retail sales numbers on Wednesday. “It’ll give us a really good view into the trajectory of the consumer going into the third quarter,” Mr. Bhave said.

My separate comment: this metric is increasingly useless in predicting the state of the consumer if at 3.9% unemployment and expectations of 3% inflation over the next 5 years, the sentiment is worse than the worst of '08.