High Prices Are Vexing Consumers, But They Expect That To Change

Consumer sentiment dropped for the fourth consecutive month in July as high prices continued to weigh down optimism about the economy.

The consumer sentiment index fell in July, declining more than two index points to 66.0, according to data released Friday from the University of Michigan. It’s the lowest reading for the index since November and short of the increase economists predicted.

“The index remains low, historically consistent with a recession, and seemingly inconsistent with the pace of economic growth and strength of the job market,” wrote Dante DeAntonio, economist at Moody’s Analytics.

Sentiment Doesn’t Match Economic Growth

The way Americans feel about the economy has been at odds with the country’s financial growth so far this year. As high prices continue to squeeze household budgets, shoppers feel inflation more acutely than a slowing but strong job market or bullish stock sentiment.

Sentiment has improved from the lows seen when inflation peaked in 2022 but still has not returned to pre-pandemic levels.

“Although sentiment is more than 30% above the trough from June 2022, it remains stubbornly subdued,” said Survey Director Joanne Hsu.

Inflation Expectations Improve

Consumers’ feelings about future inflation continued to improve, despite their dour thoughts on current high prices.

They predict inflation will be 2.9% this time next year, a smaller number than previously predicted. That was the second month in a row expectations fell and is similar to pre-pandemic predictions.

“Nearly half of consumers still object to the impact of high prices, even as they expect inflation to continue moderating in the years ahead,” Hsu said.

Long-term inflation expectations also moved lower. Five years from now, consumers expect inflation to be 2.9%, less than what they anticipated in June.

Federal Reserve officials closely watch consumer inflation expectations, which can give indications on the path that prices will take in the future. 

“Inflation remains a drag on consumer spirits, though that may finally change in the months ahead if inflation continues to fall, and real wage growth remains strong,” wrote Robert Frick, Navy Federal Credit Union corporate economist.