MNI INTERVIEW: U.S. Sentiment Turns Up On Disinflation - UMich

Decreased worries about inflation are making consumers more optimistic about the economy, a sign that the Federal Reserve's monetary tightening campaign is having its desired effect, the head of the University of Michigan's Survey of Consumers told MNI.

"We had a pretty strong increase in sentiment from last month to this month and we saw it across every demographic and this improvement in short run inflation expectations is also across the board. This isn't usually the case," said Joanne Hsu in a phone interview Friday. "It's a consensus on improved expectations over the economy as well as improvements in inflation."

The University of Michigan's preliminary June reading on the overall index of consumer sentiment came in at 63.9 up 7.9% on the month and above expectations for 60. The perception of current conditions increased 4.8% to 68.0 and the expected index increased 10.6% to 61.3.

"The main story here is that consumers are feeling a bit less uneasy about the economy," Hsu said, pointing to the resolution of the debt ceiling crisis and inflation. "When it comes to fundamentals in the economy, they are noticing a slowdown in inflation in a number of areas, not just gas, and they have folded that into their expectations and their sentiment."

HEARTENED FED

The University of Michigan survey's reading of one-year inflation expectations receded for the second consecutive month, falling to 3.3% in June from 4.2% in May, the lowest since March 2021. Still, the measure of five-year inflation expectations was little changed from May at 3.0%.

Fed officials "should be heartened by what they're seeing. Two consecutive months of sharp declines in inflation expectations is really a great sign. Caution should come from the fact that long-run expectations haven't budged at all," said Hsu, a former principal economist at the Fed board's division of research and statistics. (See: MNI INTERVIEW: Inflation Drop Warrants Fed Pause - Ex IMF Econ)

LABOR CONCERNS

One caveat to the positive news was increased concern from consumers about their income expectations and possible signs of weakening in the labor market.

"Across the board consumers have downgraded their income expectations, both in nominal terms as well as in real terms. Younger consumers in particular had the smallest increase in sentiment this month and are expecting unemployment rates to rise in the year ahead," Hsu said.

"This is something to watch very carefully in the months ahead because of the strong labor market and strong incomes. That's been the primary thing supporting consumer spending and if consumers feel less confident about that, it could lead to a less a lower willingness to spend," she added.

Another reason for worry: the UMich survey director emphasized "sentiment remains extremely low from a historical standpoint," she said.

"Prices still remain really high. The share of consumers telling us that high prices are weighing down their living standards is basically unmoved and actually higher now than it was in the beginning of the year."

Still, Hsu expects ongoing disinflation to keep consumer sentiment on an upward trajectory. "I don't expect them to continue climbing at the same rate going forward but if inflation continues to slow consumer sentiment will continue to improve."

Source: University of Michigan Survey of Consumers