Consumer Sentiment Sinks in February: Economist Flags 'Unusually Large' Rise in Inflation Perception

Consumer sentiment in the United States took a significant hit in February, as worries over rising inflation weighed on consumers' optimism. The University of Michigan's Consumer Sentiment Index (CCI) dipped to 67.8 in February, down by 4.6 percentage points from January and missing economist forecasts of 71.1. This decline marks the second consecutive monthly drop and the first such back-to-back drop since June 2024. Both current conditions and future expectations deteriorated, with all five components of the index declining.

The subindex tracking consumer expectations for the economic outlook fell to 67.3, down from 69.3, missing forecasts of a rebound to 70 and reaching its lowest level since December 2023. Current conditions plunged from 74 to 68.7, a sharp 7.2% decline, far below the expected 73. The steepest drop was seen in buying conditions for durable goods, which plummeted 12%.

A major red flag emerged from inflation expectations, which surged unexpectedly. The one-year inflation outlook jumped to 4.3%, up one full percentage point from last month and the highest reading since November 2023. Long-term inflation expectations edged up to 3.3%, well above the pre-pandemic range, adding to concerns that inflationary pressures may persist longer than previously anticipated. "Many consumers appear worried that high inflation will return within the next year," the University of Michigan said in its report.

The market response was swift, with stocks tumbling, Treasury yields surging, and gold hitting fresh record highs as investors reassessed inflation risks and flocked to safe havens. The S&P 500 – as tracked by the SPDR S&P 500 ETF Trust SPY – fell 0.5% by 10:20 a.m. in New York, with tech stocks underperforming, down 0.6%. Gold prices, tracked by the SPDR Gold Trust GLD, climbed 0.9% to $2,880 per ounce, setting a new all-time high. Treasury yields surged, reflecting rising nervousness among bond investors. Longer-term maturities rose by as much as 7 basis points. The iShares 20+ Year Treasury Bond ETF TLT slid 0.8%.

The decline in consumer sentiment is correlated with specific economic indicators, such as GDP growth, unemployment, and inflation rates. The concerns about rising inflation, slowdown in GDP growth, and the labor market's recovery contribute to the decline in consumer sentiment, as consumers become more cautious about their spending and the overall economic outlook.

The primary factors driving the "unusually large" increase in inflation perception among consumers are sustained high inflation perception, even after current inflation rates have slowed, and frequent purchases of essential items, which heighten inflation awareness. These factors are expected to evolve in the coming months as incomes rise, gradually easing consumer perceptions of high inflation. However, it is unlikely that inflation perceptions will quickly return to pre-high-inflation levels, as grocery prices rarely decrease historically.

Policymakers and communication channels can help address evidence-based causes of persistent high inflation perception, improving public understanding and boosting consumer confidence. Clear communication about the current state of the economy and the factors driving inflation can help bridge the gap between expectations and reality, supporting economic growth.