Consumer Sentiment Rebounds as Inflation Expectations Hit 50 Year Low

U.S. consumer sentiment snapped back in February from a two-year low hit last month, indicating that the weak December retail sales reported this week were a temporary slump.

The University of Michigan’s preliminary February sentiment index jumped to 95.5 from January’s 91.2. Economists had expected a more modest rebound to 93.

This suggests that sentiment in January was dragged down by December’s stock market turbulence and the government shutdown. According to the University of Michigan survey’s chief economist, Richard Curtin, the February number still reflected a bit of a drag from the shutdown and uncertainty about whether the government might shutdown again at the end of this week.

“The lingering impact of the shutdown was responsible for some of the negative economic evaluations, and, at the time that these interviews were conducted, uncertainty about whether a second shutdown would occur continued to have a slight depressing impact on confidence,” Curtin said in a statement.

The measure of expectations surged 6.3 points higher, indicating a jump in optimism. This was fueled by a stark drop in expectations for inflation over the next five to ten years, matching the lowest level in the past half century. Expectations for higher interest rates also fell.

Falling inflation expectations boosted expectations for inflation-adjusted incomes, as fewer consumers expect their income gains to be lost to higher prices.

“While nominal income expectations remained at modest levels, consumers more frequently expected gains in their inflation-adjusted incomes in early February than at any other time in more than fifteen years,” Curtin said.

The measure of current conditions rose 1.2 points.

Although confidence is now below the sky-high heights hit in the first two years of the Trump administration, consumer sentiment remains elevated compared with historical levels.

Curtin added that the low levels of inflation expectations will make it hard for the Fed to hike rates. The Fed recently changed its message on monetary policy, promising to be “patient” and not hike unless it sees evidence of inflation.