Consumer Sentiment Rebounds, Inflation Expectations Fall

Consumer sentiment saw a sharp rise of 8% in June, marking its highest point in four months.

This surge in optimism comes in the wake of easing inflation and the resolution of the looming debt ceiling crisis by policymakers

With the short-run outlook on the economy experiencing a significant rise of 28% and the long-run perspective seeing an impressive 14% increase.

The sentiment index is now 28% above its historic low from just a year ago.

Despite the improving sentiment, consumers remain wary

The present sentiment, while on an upward trajectory, is still considered low by historical standards, given the softened income expectations. Indeed, a majority of consumers are still bracing themselves for difficult times in the economy over the coming year.

In tandem with the rise in consumer sentiment, year-ahead inflation expectations have taken a downturn for the second month in a row. The fall from 4.2% in May to 3.3% in June represents the lowest figure since March 2021.

While this downward trend is seen in year-ahead inflation expectations, long-run inflation expectations appear stable, hovering between 2.9% and 3.1% for 22 out of the last 23 months.

Notably, the long-run inflation expectations are still relatively high compared to the 2.2%-2.6% range observed in the two years before the pandemic. This reflects the uncertainty and volatility that still grip the economic landscape, even as some aspects, such as inflation, show signs of improvement.

Closing thoughts

The recent lift in consumer sentiment and decline in year-ahead inflation expectations signals a positive shift in how people are perceiving the economy.

But, caution prevails as income expectations remain soft and long-run inflation expectations remain somewhat elevated.