US Inflation Expectations Surge Amid Tanking Consumer Sentiment

By Naveen Athrappully

Americans expect inflation to worsen in the coming months and have lower expectations regarding personal finances, indicating a dismal national economic outlook.

“Year-ahead inflation expectations rose from 3.2 percent last month to 4.2 percent this month, the highest reading since May 2023,” said an Oct. 27 survey report by the University of Michigan. Coinciding with the surge in inflation, consumer sentiment fell to 6 percent in October after two consecutive months of little change. “While consumers recognize that inflation has slowed down from its peak last summer, they cannot ignore that their budgets remain stretched and their purchasing power reduced,” said chief economist Joanne Hsu, director of the surveys.

“Given the high-frequency and widespread nature of food and gas purchases across American families, it is no surprise that concerns over the prices of these goods loom particularly large in the minds of consumers. Even so, strength in incomes continues to support aggregate spending for the time being.”

Around 47 percent of consumers reported that high prices were eroding their living standards—8 percentage points higher than in September.

When talking about inflation, consumers “spontaneously pointed” to the prices of gas and groceries. “Spontaneous mentions of high prices for larger purchases like durables and vehicles have been relatively flat this month.”

Regarding personal finances, lower-income consumers saw little change, while middle and higher-income consumers have seen declines since August, which is partly due to the “recent weakness in stock markets.”

One-year expectations of consumer’s personal finances dropped 8 percent from last month, while year-ahead expectations on business conditions plunged 16 percent.

“The drumbeat of other negative headlines—war in the Middle East, the just-resolved leadership crisis in the House of Representatives, daily developments with Trump’s legal troubles, among others—has produced its own drag” on consumer sentiment, Ms. Hsu said.

Consumer expectations on long-run inflation edged up from 2.8 percent last month to 3.0 percent this month, staying within the narrow 2.9-3.1 percent range for 25 of the last 27 months. This is also well above the 2.2-2.6 percent range seen in the two years prior to the COVID-19 pandemic.

Inflation and Interest Rates

Consumer worries about inflation come as the U.S. Federal Reserve has been attempting to bring inflation down by raising interest rates. The action has resulted in the American economy facing an environment of rising prices and elevated rates, putting pressure on household budgets and business finances.

Since March 2022, the central bank has raised its benchmark interest rate by 500 basis points to a range of 5.25 percent to 5.5 percent, which is the highest level in 22 years.

During the last Fed meeting, the central bank did not raise the interest rates. At the time, Federal Reserve Chair Jerome Powell suggested that there may be no rate hike in the upcoming meeting scheduled between Oct. 31 and November 1.

However, the Fed’s “Summary of Economic Projections” from September left the door open for one more potential rate hike.

Speaking at a business conference earlier this month, Federal Reserve Gov. Michelle Bowman said that interest rates may need to move up higher to deal with the inflation issue.

“Inflation continues to be too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2 percent goal in a timely way,” she said.

Ms. Bowman warned that there is a “continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months.”

Mr. Powell admitted that inflation remains high and that economic growth may need to ease to bring it down to the Fed’s target rate of 2 percent. Annual inflation in September was 3.7 percent.

However, the economy grew by 4.9 percent in the third quarter of 2023, accelerating from the 2.1 percent growth in the previous quarter, which can put pressure on the Fed to raise rates.

Struggling Under Inflation

The elevated rate of inflation has made life tough for Americans. A Gallup survey published in May showed that 61 percent of U.S. citizens were facing financial hardship in their households due to elevated prices—the highest since 2021, when Gallup began to track the data.

“A relatively steady 15 percent of U.S. adults say the hardship created by inflation is ‘severe’ and affects their ability to maintain their current standard of living,” according to a May 18 Gallup survey report. This is “statistically similar to the prior two readings and has not varied greatly since the first reading.”

Lower-income Americans faced greater difficulty from inflation than people in the higher income brackets.

An April Gallup poll found inflation as the top concern for Americans. While 35 percent said inflation was the biggest issue; 11 percent cited the cost of owning or renting a home; and 9 percent saw “too much debt” as a major problem.

In a recent interview with CNBC, former Walmart CEO Bill Simon said that consumers had an “incredible 10, 12-year run” when “markets were buoyant, interest rates were low, and money was available.”

But now, factors like inflation and high interest rates were working to sap consumers’ propensity to spend, he said. “That sort of pileup wears on the consumer and makes them wary … For the first time in a long time, there’s a reason for the consumer to pause.”