Consumer sentiment unexpectedly soured in May, the preliminary read on the University of Michigan’s gauge showed.
At 82.8, the headline print missed expectations and represented a retreat from April’s final read of 88.3.
Both the current conditions and expectations gauges tumbled.
Spoiler alert: The problem is inflation expectations, which appear to be coming “slightly” unmoored.
“Consumer confidence in early May tumbled due to higher inflation,” Richard Curtin, the survey’s chief economist, said Friday.
Year-ahead expected inflation absolutely surged, jumping to 4.6%, a rather alarming monthly leap from April’s comparatively benign 3.4% read (figure below).
The 1.2% monthly jump was tied for the second-most in three decades.
Perhaps more disconcerting, longer-term inflation expectations rose considerably as well, to 3.1% in May from 2.7% in April (figure below).
That’s the highest in a decade. Real income expectations now sit at the weakest in five years.
Curtin went on to note that the “average of net price mentions for buying conditions for homes, vehicles, and household durables were more negative than any time since the end of the last inflationary era in 1980.”
I suppose it’s only fitting that a week defined by the most dramatic CPI print in recent memory (and a hot read on PPI) should close on an inflationary note.
“Clearly consumers are noticing what’s going on,” ING’s James Knightley remarked. “It’s possible the recent outage of the Colonial pipeline and fears of gasoline shortages have played a part [so] we acknowledge the potential for a partial reversal next month, but we doubt it will be a full retracement.”
Curtin suggested consumer spending will hold up due to “pent-up demand and record saving balances.” Retail sales data for April disappointed on Friday and, as mentioned here, the “excess savings” narrative will likely persist until proven erroneous.
But Curtin said “the combination of persistent demand in the face of rising prices creates the potential for an inflationary psychology, fostering buy-in-advance rationales and cost-of-living increases in wages.”
On some interpretations, that could be a positive development. It would certainly rule out a descent into the deflationary abyss. But it also defines the “spiral” that some warn is imminent. The question is whether it gets out of control or, more accurately to reflect the fact that the US is the most advanced economy on Earth and prints the world’s reserve currency, whether the situation becomes uncomfortable, where that means inflation begins to materially outstrip wage gains with deleterious effects for the very people the current policy conjuncture aims to support.
Speaking of the current policy conjuncture, Curtin noted that “policy commitments to establish full employment while allowing inflation to meaningfully rise have never been attempted with the additional micro goals of equity and fairness across population subgroups.”
His contention is that “shifting policy language and even minor rate increases could douse inflationary psychology.”
That hints at the million-dollar question (or the $2-million question if inflation sets in): If prices do begin to move materially higher on a sustainable basis, will a 25bps or 50bps rate hike coupled with a taper be enough to alter expectations?
Or would that simply lead to losses for risk assets without ameliorating price pressures, thereby piling a reverse wealth effect atop higher consumer prices and making things considerably worse?