Friday’s release of the University of Michigan’s final May consumer confidence index showed a significant drop in U.S. consumer sentiment this month. At the same time, the number of Americans worried about soaring prices hit a record high.
According to the data, the final consumer confidence index for May was 82.9, little changed from the initial value of 82.8 in May, but compared with the final value of 88.3 in April, there was a significant drop. Both figures were down significantly from April.
The financial blog ZeroHedge pointed out in its analysis after the data was released that the final consumer confidence index of 82.9 this month echoed the results of a previous survey by the U.S. Economic Consultative Council (The Conference Board). In addition, the current economic situation index and the consumer expectations index in this survey both fell, and there is still a significant gap from the pre-epidemic level.
In terms of inflation, the survey showed that the final value of consumer expectations for inflation in the coming year remained at 4.6%, up 1.2 percentage points from 3.4% last month, while the expected value of inflation in the next five years was slightly revised down to 3% (preliminary value: 3.1%), up 0.3 percentage points from 2.7% last month. It should be noted that inflation expectations for the coming year have reached or significantly exceeded 4% very few times in this century, while inflation expectations soared above 5% going back to 2008.
For reference, the break-even inflation rate, which measures inflation expectations in the U.S. bond market, has been on the rise since the beginning of the year, with the current 5-year roughly at 2.6% and the 10-year at 2.4% to 2.5%.
In addition, a record number of consumers surveyed in the survey said the prices of housing, cars and household durables have risen, while ZeroHedge used the headline “Record number of Americans worried about soaring prices” when analyzing the data. But Richard Curtin, head of the University of Michigan’s Consumer Confidence Survey, doesn’t seem worried about inflation in the report.
Although high inflation will shrink real income, but the gains in consumer spending is undoubtedly significant. For now, it is unlikely that consumers’ inflationary psychological expectations will continue to grow, but they cannot be completely ignored either. Policymakers need only shift the language of policy as well as a small rate increase to douse inflationary expectations. Such a move would not surprise consumers, as two-thirds expect interest rates to move higher in the coming year.
Prior to the release of this survey, the U.S. released a core inflation indicator for April that exceeded expectations. According to the U.S. Department of Commerce, the U.S. PCE price index rose 3.6% year-over-year in April, beating expectations of 3.5% and improving sharply from the previous value of 2.3%, the fastest rate of growth since 2008, while well above the Federal Reserve’s official inflation target of 2%. Meanwhile, excluding food and energy prices after the core PCE price index rose 3.1% year-on-year in April, more than expected 2.9%, a significant increase from the previous value of 1.8%, while also hitting the highest since 1992. Following the release of the data, some analysts believe that the key inflation indicator rose faster than expected in April, with the biggest driver coming from the base effect – the overall base of the data was lower in the same period last year due to the epidemic embargo. At the same time, as the U.S. state economies restarted, demand rose sharply in all areas, but the relevant supply chain is not yet fully ready.
However, the market for the Fed rate hike is not expected to be reversed because of higher-than-expected inflation. According to CME “Fed Watch” data, after the release of the data, the Fed in June to maintain interest rates in the 0%-0.25% range is 89%, the probability of a 25 basis point hike to 0.25%-0.50% range is 11%; September to maintain interest rates in the 0%-0.25% range is 89%, the probability of a 25 basis point hike. The probability of a 25 basis point rate hike is 11%.
U.S. Treasury Secretary Yellen is also not worried about inflation, she said at a House Appropriations Committee hearing on May 27 EST that the inflation witnessed so far is only a temporary phenomenon, stemming from price changes driven by shifts in consumer spending, and those shifts are related to the new crown epidemic and supply chain bottlenecks. In other words, the high inflation is due to the base effect of last year’s very low indicator data and the shortage of raw materials. She believes that the current high inflation may last until the end of this year, and then there will be a moderation.
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