UMich Sentiment Slumps In August As War Re-Escalated, Inflation Fears Tick-Up

Following July's rebound to pre-war levels, the preliminary August University of Michigan Consumer Sentiment index was expected to weaken modestly as the MidEast re-escalated (and with it the price of gas).

Sure enough, the headline sentiment index tumbled from 55.2 to 51.0 (55.0 exp) with both Current Conditions (51.8 vs 54.8 prior vs 54.9 exp) and Expectations (50.6 vs 55.4 prior vs 55.2 exp) also both tumbling...

Decreases in sentiment were seen across the political spectrum, with Republicans exhibiting the strongest month-to-month decline in August. Sentiment among Republicans is now 19% below readings just prior to the Iran conflict and the lowest since the 2024 election.

Although the early-month weakening in sentiment was pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree.

As Surveys of Consumers Director, Joanne Hsu noted: "these groups are all particularly vulnerable to any erosion of purchasing power stemming from inflation."

Across all consumers, only 8% expect their income growth to exceed inflation in the year ahead, down from 18% in December 2024, a reflection of the belief that high prices will continue to be burdensome.

While views of personal finances saw only minor declines, expected business conditions sank 11% for the short run and 17% for the long run.

Year-ahead inflation expectations ticked up from 4.2% in July to 4.3% this month. The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings.

Long-run inflation expectations held steady at 3.3% for the third consecutive month, remaining a bit higher than its 2024 range of 2.8% to 3.2%.

Interestingly, it is Republicans' fear of inflation that is flat to rising (admittedly from very low levels) while Democrats and Independents see inflation continuing to slow...

Slowing inflation (CPI/PPI), weaker retail sales, and now sentiment sliding... not exactly a recipe for rate-hikes...