Consumer Sentiment Hit By Inflation Concerns

In this article:
1. University of Michigan consumer survey misses consensus.
2. US consumers are gloomy.
3. Inflation is rampant.
4. The Fed may have to pivot on policy.

Friday's preliminary consumer sentiment reading from the Univesity of Michigan was sobering. US consumers are hurting. Last month's print was 71.7, and 72.5 was the consensus for Friday's number - it came in at a paltry 66.8. Faced with the prospects of longer and broader inflation, consumers are despondent. Earlier in the week, headline CPI, at 6.2% y/y, inferred the steepest inflation reported in 31 years. This is reflected in consumer confidence, now at its lowest level in a decade. Previously, we suggested that the Fed may be behind the curve in terms of monetary policy. In our estimate, the Fed has reached a ceiling on how far it can continue with its view of "transitory" inflation. In other words, a pivot in policy has become probable.

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In this chart we consider the Dallas Fed's trimmed mean PCE. It is a good gauge of core inflation as outliers have been discarded in its calculation. Our interpretation is based on the red and blue Bollingers and the lower chart, which is the fed funds rate. Whenever the trimmed mean PCE moved into the area of strength (upper blue and upper red bands), the fed usually reacted - as can be seen by the increase in the fed funds rate (blue verticals).

Of note, this did not happen after the GFC (first green rectangle). Here, the Fed allowed for inflation to normalise and it did. The difference this time is the level of the trimmed mean PCE. We have drawn a dashed gray line at 2%, which is referenced as a target for the Fed's price stability mandate. We do acknowledge the change announced in August 2020, where the 2% was changed from an absolute target to an average target. However, the trimmed mean has already discarded outliers, which suggests that the Fed is very close to where it wants to be. The current reading is 2.33%. Given this, unless there is a certain retraction in inflation in the near- to mid-term, the Fed will need to seriously consider a pivot in its current monetary policy.