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First Cut: Preliminary Consumer Sentiment Index recovers further in October

The October preliminary University of Michigan Consumer Sentiment Index was up 2.8 points to 96.0, recovering further from the decline to 89.8 in August and subsequent rise to 93.2 in September. If consumers remain overall relatively confident about conditions, they have lost some of the buoyancy of the prior two years.

Current conditions sentiment bounced back 4.9 points to 113.4 in October, and was the highest since 113.3 in March. Consumers are focused on the still healthy labor market, cumulative gains in income, declining interest rates, and tame inflation as seen in household purchases like gasoline.

Sentiment regarding the economy six months from now did not regain as much ground, rising 1.4 points in October to 84.8. Consumers are looking ahead to an even more contentious political environment at home and have more worries about conditions abroad. The news cycle will restrain overall optimism.

The 1-year measure for inflation expectations dipped three-tenths to 2.5% in October, a decline that brought the reading to the low end of the range of recent expectations. In itself it would not suggest that expectations were in danger of becoming unanchored. However, the 5-year measure that is more in line with the Fed’s medium term horizon fell two-tenths to 2.2%, a record low for this measure. With some Fed policymakers particularly worried that inflation expectations are too low and that the Fed needs to defend the credibility of its 2% inflation target, this is likely to be a point of contention at the October 29-30 FOMC meeting unless it is revised higher in the final Consumer Sentiment Index report at 10:00 ET on Friday, October 25.

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