HomeEconomic IndicatorDeclining US consumer sentiment impacts inflation fight, with the dollar playing a...

Declining US consumer sentiment impacts inflation fight, with the dollar playing a crucial role.

US Consumer Sentiment Deteriorates Amid Inflation Concerns

Consumer Sentiment Declines

US consumer sentiment experienced a decline in October, with households expressing concerns about higher inflation in the coming year. Despite this, the labor market’s strength is expected to continue supporting consumer spending.

Reasons for Decline

The decline in sentiment reported by the University of Michigan for the third consecutive month was observed across various demographic groups. The rise in gasoline prices, which has since reversed, likely contributed to this decline. Furthermore, the survey’s cutoff date was October 11, shortly after Hamas launched an attack on Israel and amidst ongoing strikes in the automobile industry and political turmoil in Washington.

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Volatility in Sentiment

Shannon Seery, an economist at Wells Fargo, notes that sentiment can be influenced by various geopolitical events and macroeconomic uncertainties. However, it does not necessarily align with broader spending patterns. Seery predicts a continued slowdown in spending rather than a collapse.

Preliminary Consumer Sentiment Index

The University of Michigan’s preliminary reading on the overall consumer sentiment index for this month came in at 63.0, lower than September’s 68.1. Economists had anticipated a reading of 67.2.

Impact on Consumer Spending

Despite the decline in sentiment, consumer spending continues to be driven by higher wages resulting from a tight labor market. Additionally, consumers still have excess savings accumulated during the COVID-19 pandemic. In September, the economy generated 336,000 jobs.

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Inflation Expectations

The survey revealed that consumers’ 12-month inflation expectations reached a five-month high, standing at 3.8% this month compared to 3.2% in September. The five-year inflation outlook also rose to 3.0% from 2.8% in the previous month. These figures remain above the pre-pandemic range of 2.3% to 3.0%.

Import Prices and Inflation

Import prices experienced minimal growth in September, primarily due to a strong dollar that depressed prices of non-petroleum products. This trend is expected to help lower domestic inflation over time.

Impact on Monetary Policy

The Federal Reserve is closely monitoring inflation expectations as it determines the future path of monetary policy. Since March 2022, the central bank has raised its benchmark overnight interest rate by 525 basis points to the current range of 5.25% to 5.50%.

Import Deflation

While rising bond yields and a stronger US dollar may pose challenges for American exports, they have a positive effect on imported goods’ prices. Import prices, excluding petroleum, decreased by 0.3% in September.

Price Changes by Country

  • Prices of imported fuel rose by 4.4%, while imported food prices dropped by 1.3%.
  • Excluding petroleum, import prices decreased by 0.3%.
  • Import prices have dropped by 1.7% over the past 12 months.
  • Imported goods from China saw a 0.3% price decrease, while prices of goods imported from Canada increased by 0.8%.
  • Mexican goods import prices rose by 3.7% year-on-year.

Impact on Consumer Inflation

Jeffrey Roach, chief economist at LPL Financial, suggests that declining import prices for consumer goods and auto parts should minimize the risk of a resurgence in consumer inflation.

As consumer sentiment wavers and inflation concerns persist, the US economy continues to navigate through uncertain times. While the labor market remains robust, the Federal Reserve’s focus on managing inflation expectations will shape the future of monetary policy.

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