Summary
Highlights
The University of Michigan's preliminary June consumer sentiment reading came in at 48.9, beating estimates and the previous month's reading. This led to an immediate positive market reaction, with commentators suggesting a consumer recovery.
Despite the increase, the current 48.9 reading is still below the Great Recession trough of 55 and significantly lower than the pre-2008 healthy range of 85-100. This indicates a historically depressed consumer, not a recovery.
The improvement in sentiment was primarily driven by a temporary dip in gasoline prices during the survey period. Lower-income consumers, who spend a larger portion of their budget on gas, were the most impacted by this relief.
The survey data, collected between May 19th and June 8th, is already stale. Just three days after the data closed, the May Producer Price Index revealed a 23.4% surge in wholesale gasoline prices, indicating that the relief felt by consumers is already reversing in the supply chain.
The one-year inflation expectation decreased slightly to 4.6%, but still suggests consumers anticipate significant price increases. More importantly, the five-year inflation expectation, closely watched by the Fed, came in at 3.4%, exceeding the Fed's anchored comfort zone of approximately 3.2%. Unanchored long-term inflation expectations can lead to a self-fulfilling prophecy of higher wages and prices.
Given the unanchored five-year inflation expectations and rising wholesale prices, the Federal Reserve is unlikely to see the consumer sentiment beat as a reason to ease monetary policy. The data does not provide justification for a rate cut, and the Fed is expected to hold its current stance.
The lower-income households who drove the sentiment beat are also the most vulnerable to the anticipated rebound in gasoline prices. Their sensitivity to gas prices means they will likely experience a significant downside surprise in future readings.
While the consumer sentiment number did tick up, it remains historically low. The increase was fueled by a temporary and now reversing dip in gasoline prices, and long-term inflation expectations are still above the Fed's target. The market is reacting to a misleading headline, ignoring critical underlying data that suggests caution.