Will Weak Consumer Sentiment Hurt Spending Despite Lower Inflation Expectations?

Consumers, looking ahead, think inflation’s growth rate will moderate.

But their outlook about the economy right now, and where it’s headed, is muted.

To that end, the University of Michigan released its Consumer Sentiment report for September that showed that the overall sentiment was 67.7 points, down 1.8 points from August.

Additionally, the “year-ahead inflation expectations” moderated from 3.5% in August to 3.1% this month. Long-run inflation expectations — which looks out over the next five years — were 2.7% in the latest reading, and are roughly flat with last September’s five-year horizon.

The Data in Context

The data for September is preliminary, and will be revised later in the month. But it should be noted that though the “overall” sentiment above of 67.7 is better than the 58.7 of last September, the newest disclosure is below the long-term historical average reading of 86.

The University’s report comes the same week that separate data via the Consumer Price Index from the U.S. Bureau of Labor Statistics underscore an acceleration of inflation into August, as prices in several key spending segments quickened.

As we reported, overall prices rose 0.6% in August, as measured month over month — and represent the fastest pace in more than a year. Beyond the double-digit percentage increases in gasoline, other areas of “necessary” spending were more expensive, too.

The CPI disclosed that grocery prices were 0.2% more expensive in August and has risen 3% in the last year. The costs of going out to eat were 0.3% higher month over month, up 6.5% in the past year. And, as we noted, food has become one of the more expensive categories, as measured in terms of annualized inflation rates, up 4.3% and outpacing the overall inflation rate.

Food price inflation also outpaces the overall 2.7% inflation rate that consumers in the Michigan survey expect through the next year.

Pulling Back Where Possible?

It may be the case that consumers temper what they spend, and where. If consumers still see inflation as being firmly entrenched — and it seems that they do, over the long haul — then it makes sense they will find low-hanging fruit in cutting back on non-essential choices.

For 10% of consumers who live paycheck to paycheck (about 60% of the American population) nonessential spending is a key determinant as to why they live paycheck to paycheck, and causes them to struggle to make ends meet, as PYMNTS data have shown.

An analysis of the latest consumer sentiment data alongside other data and observations also signals some pressure on non-discretionary spend. Real incomes, as measured by the U.S. Census Bureau, fell in 2022 and have been volatile in recent months.

There may be fewer treats in the basket when we’re in the grocery aisles, and there may be less splurging on clothes and gadgets in the months ahead, until inflation’s rise appears to finally subside.