With inflation continuing to slow, US consumers are taking notice — and they’re feeling more optimistic.
Consumer sentiment tracked by the University of Michigan improved in June, according to a final reading, up 9% from May. That was due to inflation’s steady retreat in recent months and consumers feeling more cheery about the economy’s future. Consumers’ economic outlook for the year ahead jumped 28% over last month.
“Overall, this striking upswing reflects a recovery in attitudes generated by the early-month resolution of the debt ceiling crisis, along with more positive feelings over softening inflation,” said Joanne Hsu, director of the university’s Surveys of Consumers, in a release Friday.
The Commerce Department reported Friday that the Personal Consumer Expenditures price index, the Federal Reserve’s preferred inflation gauge, rose 3.8% in May from a year earlier, down from April’s 4.3% annual rise. Revised data released Thursday showed the economy was stronger than previously thought in the first three months of the year and consumer spending remained in positive territory in May for the sixth straight month, according to the Commerce Department.
Still, economists expect the economy to lose steam in the months ahead, but a full blown recession this year is anything but assured.
Bank of America CEO Brian Moynihan told CNN in an exclusive interview this week that he expects the US economy to slip into a recession in “the first part of next year” instead of later this year as he previously estimated. The resumption of student loan payments this year, in addition to the Supreme Court blocking President Joe Biden’s student loan forgiveness program, also spells economic pain for Americans.
And the Fed isn’t done raising interest rates just yet. Most Fed officials estimate that two more quarter-point rate hikes will occur this year and don’t expect inflation to reach the central bank’s 2% target until 2025.
More action from the Fed is centered on core inflation remaining stubbornly high and not decelerating as fast as the headline number. Much of that is due to the labor market remaining robust, propping up inflation in the labor-intensive services sector, Fed Chair Jerome Powell said in a panel hosted by the European Central Bank this week.
Signs of enduring strength in the labor market and the broader economy might embolden the hawks of the Federal Open Market Committee, the Fed group that sets monetary policy. The jobs report next week will be a key piece of data that will inform officials for their July decision.
Consumers’ expectations for inflation remain “well-anchored,” as Powell has frequently noted. Year-ahead inflation expectations retreated for the second consecutive month, according to the University of Michigan, falling to 3.3% in June from 4.2% in May. That’s the lowest level since March 2021. The optimism reflected in the survey means US consumers have faith that inflation will eventually slow to a sustainable level, which the Fed defines as 2% inflation.
But consumers face a tough economic landscape in the future as they run down their savings accounts, rack up more debt, begin to pay off their student loans, large companies continue to tighten their belts, and the Fed raises rates a bit more.
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