US Consumer Sentiment Falls to 51.7 as Inflation Worries Persist

The University of Michigan's consumer sentiment index fell to 51.7 in August from 55.2 in July, a 6.3 percent decline that leaves the gauge 11.2 percent below year-ago levels.

"Consumer sentiment confirmed its early month reading, falling about 6 percent from last month and landing about 11 percent below a year ago amid continued worries that inflation will remain elevated for the foreseeable future," Joanne Hsu, director of the Surveys of Consumers at the University of Michigan, said.

The final August reading came in above the 51.0 consensus forecast from economists polled by The Wall Street Journal. The Current Economic Conditions Index fell 5.3 percent to 51.9, while the Consumer Expectations Index dropped 7.0 percent to 51.5. Year-ahead inflation expectations ticked down to 4.0 percent from 4.2 percent in July, still well above the 3.4 percent recorded in February before the Iran conflict began. Long-run inflation expectations held steady at 3.3 percent for a third consecutive month, above the 2.8 to 3.2 percent range seen through 2024.

The persistent 3.3 percent long-run inflation expectation — a metric Federal Reserve officials watch to ensure price pressures don't become self-fulfilling — keeps the bar high for near-term rate cuts. Spot gold fell to a session low of $4,549.15 per ounce after the release, which coincided with Fed Chair Kevin Warsh's Jackson Hole speech. The next Michigan survey update publishes September 11.

Sentiment declines in August were broad-based, hitting all political groups with particular severity among Republicans. Households least equipped to absorb rising costs — older consumers, lower- and middle-income earners, and those without stock holdings — showed the sharpest drops. Hsu noted that consumers anticipate further increases in gasoline prices in both the short and long run because of ongoing policy uncertainty tied to the Iran conflict.

Expected year-ahead business conditions fell 10 percent, while the five-year outlook dropped 13 percent, suggesting households are increasingly worried that weakness could spread beyond their pocketbooks. "Any re-escalation of trade tensions will likely exacerbate these trends," Hsu said.

The current reading of 51.7 sits 38.2 percent below the index's historical arithmetic mean of 83.7 since 1978. Historically, prolonged periods at these depressed levels have closely correlated with negative GDP growth. The gauge remains above the mid-40s lows touched earlier this year but below the level recorded at the start of all six recessions since the index's inception.

Inflation Expectations Hold Above Pre-Conflict Levels

Year-ahead inflation expectations eased to 4.0 percent from 4.2 percent in July but remain substantially above the 3.4 percent recorded in February before the Iran conflict escalated. Long-run expectations held at 3.3 percent for the third straight month, a bit higher than the 2.8 to 3.2 percent band that prevailed through 2024. The persistence of elevated long-run expectations matters for the Federal Reserve because households that expect higher prices tend to demand higher wages, creating a self-reinforcing inflation dynamic.

The Conference Board's Consumer Confidence Index, a separate gauge more influenced by labor market conditions, has tracked broadly similar trends to the Michigan survey. The NFIB Small Business Optimism Index also mirrors the prevailing mood, with both measures pointing to a consumer base that remains cautious about the economic outlook.

For investors, the sentiment data reinforces a defensive posture. With inflation expectations running above pre-conflict levels and gasoline prices expected to rise further, consumer discretionary spending faces headwinds into the fourth quarter. The Consumer Discretionary Select Sector SPDR Fund (XLY) remains exposed to these dynamics as households prioritize essentials over discretionary purchases.

This article is for informational purposes only and does not constitute investment advice.