Consumer Sentiment Plummets Amid Rising Inflation Expectations, Challenging Fed’s Anchor Theory

Despite positive economic indicators, consumer sentiment decreased significantly in May, as reported by the University of Michigan Survey of Consumers. The initial reading for the month stood at 67.4, a significant dip from the previous month’s figure of 77.2, and falling short of analysts’ predictions of 76. This decrease in sentiment could be attributed to a rise in inflation expectations, as both the one-year and five-year outlooks saw an increase. In particular, the one-year outlook experienced a jump to 3.5%, which marks the highest level since November 2021, while the five-year outlook rose slightly to 3.1%. This upward trend in inflation expectations challenges the Federal Reserve’s belief that such expectations remain anchored, potentially indicating that interest rates may need to go higher to combat inflation. Lower income households appear to be particularly affected by these trends, contributing to the overall downturn in consumer sentiment.