University of Michigan Consumer Sentiment Data Reveals Marginal Improvement
But a rising one-year inflation outlook is worth watching closely
The preliminary University of Michigan Consumer Sentiment data released today has shown a marginal improvement in sentiment, with the index registering at 63.5 compared to the expected 62.1 reading.
Consumer inflation expectations rose significantly from 3.6% to 4.6%, indicating that concerns about upward price pressures persist. This may be another sign that April’s month-over-month inflation data is less likely to be as cool as what we saw for March, where headline CPI was 0.1% and Core CPI was 0.4%.
Today’s Cleveland Fed Inflation Nowcast shows meaningfully higher expectations, particularly for the headline number. This would make sense as we’ve seen energy and many other commodity costs rise during April.
Consumer Sentiment Overview
Consumer sentiment in April 2023 showed a slight increase of 2.4% from March, reaching 63.5 points. This level, however, is still 2.6% lower than the same period in 2022. The Current Economic Conditions index rose by 3.5% to 68.6 points, marking a 1.2% decrease year-over-year. The Index of Consumer Expectations also saw an increase of 1.9% to 60.3 points, which is a 3.5% decline compared to April 2022.
Overall, the sentiment remained relatively low vs historical norms, with a slight increase of less than two index points from March.
Lower-income consumers experienced a rise in sentiment, while those with higher incomes saw a decline. Despite some easing of inflation in durable goods and cars, consumers still expect high inflation to persist in the short term.
Inflation Expectations
Year-ahead inflation expectations rose from 3.6% in March to 4.6% in April, marking a considerable increase. For the past four months, these expectations have fluctuated, alternating between increases and decreases.
This uncertainty indicates that the volatility in short-term inflation expectations is likely to continue. We can see that spontaneous mentions of high prices rose with regards to personal finances.
The instability in inflation expectations appears to be confined to one-year expectations. Long-term inflation expectations have remained anchored, coming in at 2.9% for the fifth consecutive month. Over the past 21 months, long-term expectations have stayed within the narrow 2.9-3.1% range for 20 months.
Closing thoughts
April's University of Michigan Consumer Sentiment data shows a marginal improvement in consumer sentiment, with the index slightly higher than anticipated.
On the other side of the data consumers remain concerned about rising inflation, as evidenced by the significant increase in short-term inflation expectations. This may further undermine consumer participation in discretionary spending among and translate to earnings compression for impacted industries and sectors, such as retailers whose profits are driven by merchandise-related sales.
Earnings season should provide further clues on the health of the consumer. We’ll be watching closely.