U.S. consumer sentiment improves; inflation expectations rise

People carrying shopping bags walk inside the King of Prussia shopping mall in King of Prussia, Pennsylvania, U.S. November 26, 2021. REUTERS/Rachel Wisniewski/File Photo

WASHINGTON – U.S. consumer sentiment improved to a 13-month high in February, but households expected higher inflation to persist over the next 12 months, a survey showed on Friday.

The University of Michigan’s preliminary February reading on the overall index of consumer sentiment came in at 66.4, the highest reading since January 2022, up from 64.9 in the prior month. Economists polled by Reuters had forecast a preliminary reading of 65.0.

The sentiment index has rebounded from a low of 50.0 in June last year. The survey’s measure of current economic conditions increased to a reading of 72.6 this month from 68.4 in January. Its gauge of consumer expectations dipped to 62.3 from a reading of 62.7 last month, likely reflecting lingering recession fears.

The improvement in sentiment was probably driven by a rally on the stock market and persistent labor market strength. It raised hope that the economy could avoid the much-feared recession and that any downturn would likely be short and mild, economists said. Rising sentiment also suggested that the sharp declines in retail sales in November and December were a fluke.

“If recession is coming consumers sure don’t know it,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “We expect the retail sales report covering the month of January will pop back into positive territory and we already know consumers bought a lot of cars and light trucks for the first month of the year.”

Data next week is expected to show retail sales rebounding 1.5% in January after tumbling 1.1% in December, according to a Reuters survey of economists.

The University of Michigan survey’s reading of one-year inflation expectations increased to 4.2% this month from 3.9% in January. Its five-year inflation outlook was unchanged at 2.9% for the third straight month and stayed within the narrow 2.9-3.1% range for 18 of the last 19 months.

The increase in near-term inflation expectations likely reflected a recent rise in gasoline prices.

Higher inflation forced the Federal Reserve to adopt an aggressive monetary policy stance, with the U.S. central bank hiking its policy rate 450 basis points since last March from near zero to a 4.50%-4.75% range. The Fed in recent months has slowed the pace of its interest rate increases.

GRAPHIC: Umich inflation expectations (https://www.reuters.com/graphics/USA-STOCKS/gdpzqdaozvw/umichinflation.png)

“The Fed still has work to do in squelching inflation, the economy is steadily slowing, yet conditions are stable enough for the economy to eke out growth this year,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.