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First Cut: University of Michigan consumer sentiment preliminary reading about unchanged in July, inflation expectations firm up for the medium term

The University of Michigan’s preliminary Consumer Sentiment Index for July was 98.4, little changed from 98.2 in June. Sentiment about current conditions was a tad weaker at 111.1 after 111.9, while six month expectations improved to 90.1 after 89.3.

Consumers continue to view conditions in the US in a positive light. In spite of some volatility in recent months related to exogenous events like the partial federal government shutdown and uncertain trade and tariff policy, overall there has been little fundamental deterioration even with hints of slower economic growth. The labor market has not suffered even with more sluggish activity and workers are still seeing improved incomes. The recent declines in gasoline prices — although that is starting to reverse a bit — and fall in mortgage interest rates are encouraging consumers to feel optimistic about their prospects.

Confidence in the six-month outlook is less steady, but at present is higher than it has been over much of the past year. The only time it has been higher was the surge to 93.5 in May when it looked like a trade agreement with China was reached — it wasn’t — and 90.5 in September 2018 just before it was evident that growth was cooling somewhat.

The 1-year measure of inflation expectations edged down a tenth to 2.6% in July. One year expectations can be quite volatile, especially if gas prices are on the move in one direction or another. The 2.6% reading is off the lows of 2.5% seen in March and April, but below the near-term peak of 2.9% in May.

The 5-year measure of inflation expectations is the one the FOMC pays closer attention to and is more in line with how policymakers assess inflation over the medium term. It rose three-tenths to 2.6% and is back at the top of the recent trend range of 2.3%-2.6%.  If consumers are again anticipating modest upward price price pressures consistent with the Fed’s 2% inflation objective, there will be less of an argument to be made that rates need to come down to defend the FOMC’s credibility on price stability.

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