The headline consumer sentiment index inched down to 71.4 in October from 72.8 in September because of an uptick in short-term inflation expectations and higher gas prices, according to data released by the University of Michigan on Friday.
At the same time, consumer expectations for inflation in the next 12 months rose to 4.8% from 4.6%, which suggests that consumers are getting used to higher prices for the time being. The report was in line with the elevated Consumer Price Index data released this week.
But the expectation for longer-term inflation—over five to 10 years—declined to 2.8% from 3.0% in the prior month, reflecting the belief that the Federal Reserve will be able to tame any longer-term increase.
Inside the report, high prices continued to discourage consumers from buying automobiles and major household items. The indexes that gauged whether consumers felt it was a good time to buy a vehicle and major household products both declined in October.
Surprisingly, the index that measured if consumers felt it was a good time to buy a house increased sharply, to 75 from 66, likely because of the slowdown of house prices in recent months. Mortgage rates remain low and are poised to increase next year when the Fed may increase interest rates.
We expect that inflation will continue to be the top concern for consumer sentiment in the coming months.
Still, with sentiment staying at a decade-low level in the past three months, we think that the overall confidence will pick up in the last quarter of the year as the upside surprise from the September’s retail sales data suggested.