Consumer sentiment rose slightly, inflation outlook unchanged

Things may get better in the long run, but the situation is difficult at the moment.

On that note, the University of Michigan's consumer sentiment index, which measures general sentiment on everything from politics to inflation, has been higher so far in August — albeit only slightly.

However, this is a longer-term approach, as the forecast for the current economic situation was even worse in the most recent reading.

The headline here in the preliminary August reading is that the index is at 67.6 overall, which is higher than the 66.4 in July. We are a long way from the low of 50 reached just over two years ago. But we are also underwater, so to speak, compared to the readings above 100 that were reached even before the pandemic.

The assessment of the current situation fell to 60.9 this month, down from 62.7 in the previous month. We have not reached these values ​​since the end of 2022. As for expectations for the future, the value of 72.1 is the highest since 68.8 in April.

All of this can be summed up in a nutshell as saying that the future looks a little brighter, but the here and now less so. The university's recent publication made a lot of talk about the presidential election being a re-echoed election cycle; the outcome of the election, the publication said, tends to influence expectations for the future.

As always, inflation in view

At least some of these expectations about what lies ahead and what lies ahead depend on inflation. As the publication shows, “Inflation expectations for the coming year were 2.9% for the second month in a row. In the two years before the pandemic, these expectations ranged between 2.3% and 3.0%. Long-term inflation expectations were 3.0%, unchanged from the past five months. These expectations remain somewhat elevated compared to the 2.2-2.6% in the two years before the pandemic.”

The fact that inflation is still high means that consumers are probably gritting their teeth a little while enduring the current pace of 2.9% that they expect and which is actually the last official inflation rate in July.

We noted this week that Consumer Price Index (CPI) data showed that prices across the food sector rose 0.2% in July, the same pace as in June and accelerating from stagnant 0.1% increases in previous months.

Inflation remains stubborn on the essentials

The “food at home” CPI segment, which covers groceries, rose 0.1% in July and 1.1% year-on-year. “Food away from home” data, which tracks prices at restaurants and other establishments, rose 0.2% month-on-month in July, while annual price increases came in at 4.1%. The pace of shelter-in-place price increases remains a key pressure: The 12-month increase was 5.1%, and July's month-on-month increase was 0.4%, a rebound from the previous month's rate of 0.2%. Retail sales for July were reported by the Commerce Department on Thursday and, not adjusted for inflation, rose 1% in July, well above consensus estimates of a 0.4% increase.

The preliminary consumer sentiment report for August, as mentioned, takes into account the influence of politics; politics can change in a heartbeat, as can political campaigns. If longer-term sentiment is based on the poll results, longer-term sentiment will be volatile. We spend money today based on how we think things (like prices) might look tomorrow. The mixed readings in the latest sentiment report suggest that some volatility in this sentiment (and spending) is to be expected.