Consumer Sentiment Keeps Dropping in October. It Just Hit a Five-Month Low.

Consumer sentiment hit a five-month low in October after dropping further over the first days of the month.

The survey of consumers from the University of Michigan showed the figure at 46.3, compared to 48.1 last month. It is also a 13.6% drop compared to the same month last year.

Surveys of Consumers Director Joanne Hsu detailed in a statement that "buying conditions for durables plummeted amid high prices and borrowing costs."

Looking at the partisan divide, she noted that "increases in sentiment among Democrats and Republicans were offset by a decline among independents this month."

"Overall, sentiment for lower-income consumers and those with smaller stock porfolios dropped steeply this month, groups that have fewer resources to weather increases in prices. Frustration over cost-of-living continues to mount, as consumers across the political spectrum believe that the trajectory of the economy has weakened since the beginning of the year," she added.

As for year-ahead inflation expectations, they increased by 0.1 percentage points, from 4.6% and 4.7%. "The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings. Long-run inflation expectations also stepped up from 3.4% in September to 3.5%, notably higher than their 2024 range of 2.8% to 3.2%," Hsu said.

The Federal Reserve Bank of New York's September Survey of Consumer Expectations also showed inflation concerns intensifying. Median inflation expectations for the next 12 months jumped to 3.9%, up from 3.6% in August, the highest one-year reading since May 2023, when they stood at 4.1%.

The increase comes as the Federal Reserve weighs how long to keep interest rates elevated while inflation remains above its 2% target. Markets largely expect policymakers to leave the federal funds rate unchanged at their meeting later this month, following recent inflation data that came in softer than expected.

Consumers are also bracing for a sharp increase in their own spending. The New York Fed survey found median expectations for household spending growth over the next year rose 0.3 percentage points to 5.5%, the highest level since May 2023 and above the 12-month trailing average of 5%. The increase was broad-based across age and education groups.

Fed officials closely watch inflation expectations because they can influence consumer and business behavior. If households believe prices will keep rising rapidly, they may accelerate purchases or demand higher wages, while businesses may become more willing to raise prices.

For now, the New York Fed survey suggests consumers remain less worried about inflation several years into the future. Three-year inflation expectations increased only slightly, from 3.2% to 3.3%, while expectations five years ahead remained unchanged at 3%.

The shorter-term increase appears to be closely tied to the prices Americans encounter regularly. Consumers now expect gasoline prices to climb 4.8% over the next year, up from 4.6% in August.