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First Cut: June preliminary Consumer Sentiment Index off recent lows, but still consistent with slow activity

The preliminary University of Michigan Consumer Sentiment Index for June rose to 78.9 after 72.3 in May. It reflected improved perceptions of current conditions and the six month outlook. The increase still leaves the index level at one consistent with an economy in retreat and faced with elevated risks. Consumers are likely to continue to exercise caution in spending until it is clear that the worst of the pandemic is over. While some of the lifting of restrictions on movement and business activity were in place going into the Memorial Day weekend, subsequent news suggests that that might have been too soon as infection rates appear to be on the rise again.

The component for current conditions was up 5.5 points in June to 87.8, its highest in three months. The uptick was due to revival of some sectors of the economy and a return to work for significant numbers of consumers as businesses reopened and/or government aid for payrolls. The outlook for six months from now was up 7.2 points to 73.1 in June. However, the index has yet to fully retrace the decline to 79.7 in March as significant concerns remain about the duration of the COVID-19 pandemic and how much of a longer-term impact it will have on the labor market and household incomes.

The 1-year measure of inflation expectations was down two-tenths to 3.0% in the preliminary June data. This is still noticeably above where it had been in spite of sharp declines in household energy costs which usually serve to lower inflation expectations. As I said last month, I think this is due to consumers’ perceptions of less spending power than it is that prices are necessarily rising that much more. Nonetheless, prices of other nondiscretionary items – like foods in general and meats in particular – do seem to be eating up more of household budgets. The 5-year inflation expectations measure was at 2.6%, down a tenth from the prior month but also pointing to anticipation of increased prices in the future more in line with the Fed’s 2% inflation objective.

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