The sharp drop in consumer sentiment in May seems more like an overreaction to rising gasoline prices and overall inflation, rather than a reliable indicator for future spending.
Inflation expectations rose sharply to 3.5% from 3.2% for the next 12 months while longer-term expectations inched up to 3.1% from 3.0%. Sentiment among consumers fell to 67.4 in May, the lowest level since December, according to the University of Michigan survey released on Friday.
Read more of RSM’s insights on the economy and the middle market.
Inflation expectations rose sharply to 3.5% from 3.2% for the next 12 months while longer-term expectations inched up to 3.1% from 3.0%.
The rebound in inflation in the first three months of the year has soured consumers’ perceptions of the economy and their personal financial situations.
But we believe this reaction is mostly backward-looking and expect it to reverse once inflation subsides in the coming quarters. Gasoline prices have already flattened in April and dropped slightly in May.
Given the strong economic growth expected in the second quarter—projected to be between 3% and 4%, led by consumer spending—we continue to view the soft consumer sentiment data with skepticism.
A more nuanced picture of consumer sentiment emerges in the details of the survey. Overall sentiment remains solid among top income earners, who have benefited from a rising stock market that has enhanced the wealth effect. Conversely, lower-income earners have been more sensitive to inflation, as their excess savings built up during the pandemic dwindles to near zero.
Without any major fiscal support this year, we don’t think the gap between the two will go away anytime soon. But if inflation retreats as we expect and the Federal Reserve eases its monetary policy, lower income earners’ sentiment should look much brighter.
