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First Cut: Final Consumer Sentiment Index revised lower, taking a hit from tariff worries

The final University of Michigan’s Consumer Sentiment Index rose to 100.0 in May from 97.2 in April. However, the index was revised significantly lower from its preliminary reading of 102.4. The updated survey cited that a large share of respondents in final survey “spontaneously” said that tariffs were a concern for economic conditions. A revision lower was widely expected, but the lower reading was more than anticipated.

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The index for present conditions fell to 110.0 in May (previously 112.4) from 112.3 in April. Six-month expectations were up to 93.5 in May (previously 96.0) from 87.4 in April.

As I noted with the preliminary report, May could ultimately prove to be an outlier on the upside. While consumers remain confident about the labor market, signs of persistently slower economic activity will have an impact. Present conditions will be less robust and the future would look cloudier.

Tariffs may also be behind the sudden rise in inflation expectations. The 1-year measure reached 2.9% in May, its highest since 2.9% in October 2018 and 3.0% in August 2018. The arrival of the first wave of punitive tariffs in early 2018 was followed by a round of cost pass-throughs for many goods and services. Consumers may be anticipating a similar cycle. The 5-year inflation measure was up to 2.6% in May from 2.3% in April. This suggests a return to the higher end of the range of readings for the medium-term outlook after a soft patch in the economy in late 2018/early 2019 hinted that upward price pressures had abated.

When the FOMC next meets on June 18-19, it will have a solid indication that inflation expectations have not become unanchored in spite of a little short-term volatility.

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