Consumer sentiment increased to 63.9 in June, the highest since March as views on current and future economic conditions improved, according to the University of Michigan index released on Friday.
While the index has bounced off the bottom of last June, it remains much lower than the pre-pandemic level that was consistently above 90.
What is most notable from Friday’s data is the plunge in year-ahead inflation expectations to 3.3% from 4.2%.
That is a welcome development for the Federal Reserve as it tries to tame inflation. The longer-term measure for five to 10 years in the future also inched down to 3.0% from 3.1%.
Still, that should be taken with a grain of salt because of the continuing drop in energy prices—particularly gasoline—which often correlate with the index.
That said, the declines in inflation expectations reaffirm our view that after comparisons to the inflation rate of a year ago fade, inflation will likely fall into the 3% range by the end of the year.
And once that happens, consumers’ expectations would be well anchored between 3% and 3.5%, supporting one or two more rate increases by the Fed before a complete stop.
Spending plans also picked up on the month as the subindexes indicating whether it is a good time to buy big-ticket items like household appliances increased.
With consumers holding more than $600 billion in excess savings, according to our estimate, there is still more runway for spending to stay solid in the next couple of months. Even if a recession begins, spending will not slow significantly in the first few months, according to historical data.
