The final reading for January Consumer Sentiment from the University of Michigan surprised to the downside, dropping 4% and reflecting consumer concerns about the current and future economy. All three measures saw decreases and disappointed forecasts with the critical Future Expectations Index falling the most – an unexpected turn of events following the post-election bump in optimism. The Current Conditions, Future Expectations, and overall Index of Consumer Sentiment are all 10% below their level from one year ago (graphs below).
The report underscores widespread concerns regarding inflation, as long-run inflation expectations rose to 3.2%. The 3-month moving average of long-run inflation expectations is now at its highest level since the Financial Crisis, which is the only period in the last 25 years when expectations were higher (graph below).
Consumers are clearly worried about the path of inflation ahead, now expecting it to remain higher for longer. If inflation expectations don’t become more anchored, this could be an obstacle in the Fed’s battle to reach their 2% target.