MACRO: Inflation concerns weigh on consumers morale

Consumer sentiment in the US has remained virtually unchanged in the past three months, at levels comparable to the pandemic low point in April 2020, which points out that moods among Americans remain dim amid persisting supply-chain bottlenecks and high inflation. University of Michigan's Consumer Sentiment Index dropped to 71.7 in October's final reading from 72.8 in September. Today's data came in slightly better than the flash estimate and analysts' estimates of 71.4.  

Consumer confidence in the US continued to languish near the lows hit immediately following the start of the Covid-19 pandemic. Source: Bloomberg via ZeroHedge 

The expectations subindex was revised up to 67.9 from a preliminary of 67.2 while the gauge of current conditions dropped to 77.7 from a preliminary of 77.9. Meanwhile, inflation expectations for the year-ahead were at 4.8%- the highest level since 2008, while the 5-year outlook increased to 2.9% from a preliminary of 2.8%. 

Short-term inflation expectations remain at their highest since 2008 while medium-term inflation expectations hold just of recent highs. Source: Bloomberg via ZeroHedge

“The positive impact of higher income expectations and the receding coronavirus has been offset by higher rates of inflation and falling confidence in government economic policies”, said U-M economist Richard Curtin, director of the surveys.  “Uncertainty around long-term inflation rose as well, hitting its highest level in over a decade. Declining living standards due to inflation were spontaneously mentioned by one-of-every five households, concentrated among older and poorer households”, Mr. Curtin said. "The patterns of consumers' reactions to recent rises in inflation represent the preconditions that can promote an escalating inflation rate during the year ahead."

According to the University of Michigan, a tipping point would be reached at some point when consumers' incomes could no longer keep pace with escalating inflation.

Today's PCE report also seems to confirm consumer concerns about inflation. The Fed's favorite inflation indicator remains near 30-year-highs. The headline PCE Deflator rose 4.4% YoY, from August's 4.2% and Core PCE Deflator rose 3.6% YoY, the same as August, slightly below market projections of +3.7%. Both readings are at their highest levels since 1991, which makes the Fed's assurances about the transitional nature of inflation even less credible.

US PCE reading remains at its highest level in 30 years. Source: Bloomberg via ZeroHedge