Consumer sentiment fell in May to the lowest level in about five months, and expectations for inflation rose — bad signs for the economy and President Joe Biden.
The University of Michigan Consumer Sentiment Index dropped to 69.1, slightly less of a decline than forecasters had anticipated. But that marks a 10.5% drop in sentiment over the past month alone. The last time sentiment was this low was in November 2023.
Year-ahead consumer sentiment expectations also fell off. The index for consumer expectations plunged to 68.8 in May, from 76 in April.
Pre-pandemic, year-ahead inflation expectations have typically fallen within the 2.3-3.0% range, but in May, they rose to 3.3%.
Survey director Joanne Hsu said that the year-ahead outlook for business conditions saw a “particularly notable decline” in May.
“Consumers expressed particular concern over labor markets. They expect unemployment rates to rise and income growth to slow. The prospect of continued high interest rates also weighed down consumer views. These deteriorating expectations suggest that multiple factors pose downside risk for consumer spending,” Hsu said.
Additionally, the Conference Board’s consumer confidence index fell to 97 in April, the latest reading, down from a revised 103.1 the month before. That marks the lowest consumer confidence reading in 22 months.
The economy is top of mind for voters this election cycle. During past elections in which the economy has featured prominently, the biggest concerns are usually jobs or unemployment or concerns about a recession. This time around, though (and for the first time in generations), inflation is the big concern.
The most recent reading of the consumer price index, the most closely watched inflation gauge, showed that inflation fell slightly to 3.4% for the year ending in April. While the data showed a decline, that number is well above the 2% level that the Federal Reserve considers healthy.
The Fed drove up interest rates as inflation rose and has had to keep rates high because inflation has proven stickier than anticipated. That has made taking out loans and buying homes, cars, and appliances harder for consumers, further stalling consumer sentiment and confidence.
Investors are split among whether they think the first Fed interest rate cut will come at the central bank’s September meeting or at the Fed’s November meeting, which is held just days after the election, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
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The prospect of no interest rate cuts until after the election is an undesirable one for Biden, who has been working to shore up public support for the economy.
“Prices are increasing much more slowly now, but consumers are focused on the price level of goods and services before the pandemic,” said Chris Rupkey, the chief economist at FWDBONDS. “There has not been a new president ever before that was able to move heaven and Earth and bring consumer prices back down, but some in the electorate may be willing to give someone new a chance to do it.”