Consumer sentiment fell in June to the lowest level in about seven months and long-run expectations for inflation rose — bad signs for the economy and President Joe Biden.
The University of Michigan Consumer Sentiment Index dropped to 65.6, defying economists’ expectations that it would tick up. That is a 5.1% dip in consumer sentiment from the month before. The last time sentiment was this low was in November 2023.
Year-ahead inflation expectations were flat at 3.3%, while long-run inflation expectations ticked up slightly to 3.1%.
Survey director Joanne Hsu said that while consumer sentiment declined this month, the 3.5 index point dip is relatively minor in the grand scheme of things. That decline is within the margin of error for the survey.
“Sentiment is currently about 31% above the trough seen in June 2022 amid the escalation in inflation,” she said. “Assessments of personal finances dipped, due to modestly rising concerns over high prices as well as weakening incomes. Overall, consumers perceive few changes in the economy from May.”
The Federal Reserve has been closely watching inflation data and data on the overall economy to assess when it will finally begin to start cutting interest rates. At the start of the year, most economists were expecting several rate cuts in 2024, but recent hotter-than-expected inflation reports have kept pushing back the timing of the first rate cut.
Now, the Fed is thinking there will be one rate cut or perhaps two this year. Investors are a bit more bullish and expect the first cut to come in September, with at least one more downward revision after that.
In their policy statement following a monetary policy meeting Wednesday, Fed officials said there has been “modest” further progress in bringing down inflation in recent months.
The Fed has held interest rates steady since last raising rates in July 2023. The rate target is still the highest it has been since 2006, before the global financial crisis.
“Today the [Fed] decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings,” Fed Chairman Jerome Powell said at a news conference. “We are maintaining our restrictive stance of monetary policy in order to keep demand in line with supply and reduce inflationary pressures.”
If the overall economy starts to noticeably slow and sentiment keeps falling, it could prompt the Fed to cut rates sooner rather than later.
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“This was a third-straight monthly decline,” said Rubeela Farooqi, chief U.S. economist for High Frequency Economics, in response to the latest sentiment readings. “And longer-run inflation expectations rose to the highest in seven months. Overall, consumer attitudes are deteriorating likely on inflation fatigue and diminished expectations of imminent rate cuts.”
In some good news, the conference board’s consumer confidence index rose in May, according to the most recent available data. Consumer confidence rose to 102 from the 97.5 notched in April.