Consumers Sentiment Rises Amid Cooling Inflation

Consumers are feeling good about cooling inflation, and consumer sentiment continued its climb in September. 

The Michigan Consumer Sentiment Index finished September at 70.1, higher than its preliminary result earlier this month, and above the 69.3 reading that economists surveyed by the Wall Street Journal and Dow Jones Newswires were looking to see. 

The closely-watched survey showed improvement in all five of its categories, including a rise in year-ahead business expectations, as the inflation-focused survey reached its highest levels since April. 

“While sentiment remains below its historical average in part due to frustration over high prices, consumers are fully aware that inflation has continued to slow. Sentiment appears to be building some momentum as consumers’ expectations for the economy brighten,” said Joanne Hsu, director of the Surveys of Consumers. 

Inflation Expectations Fall as Price Pressures Ease

Notably, year-ahead inflation expectations in the survey fell for the fourth straight month to drop to 2.7%. The Federal Reserve closely follows consumer expectations on inflation, as officials have said that if price setters and wage payers believe that prices are moving higher, they will act in ways that create those conditions.

This increase in consumer sentiment comes as cooling inflation prompted the Federal Reserve to begin to reduce interest rates. Today’s data from the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, reaffirmed that inflation was decelerating and boosted chances of more rate cuts. The PCE index showed that annual price increases slowed to 2.2% in August, the lowest year-over-year rate in more than three years. 

“Lower interest rates will certainly provide some relief, particularly for more highly indebted consumers that will benefit from a reduction in variable rate credit or may be able to refinance higher-fixed rate mortgages originated in the past few years,” said Jim Baird, chief investment officer with Plante Moran Financial Advisors.

The positive Michigan survey stands in contrast to the similar Conference Board’s Consumer Confidence Index, which is more sensitive to labor conditions, and showed its largest drop in three years as people began expressing more worries about the jobs market. 

“Even strong indications that inflation continues to ease doesn’t alleviate the ongoing challenge posed by elevated prices, as many households continue to feel the weight of a higher cost of living,” Baird said.