LIVE MARKETS-Consumers cheer up with tariffs on pause: UMich expectations jump nearly 22%

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CONSUMERS CHEER UP WITH TARIFFS ON PAUSE: UMICH EXPECTATIONS JUMP NEARLY 22%

The mood of the American consumer, who shoulders the burden of about 70% of the U.S. economy, has turned unexpectedly sunny this month.

The University of Michigan's (UMich) preliminary take on June Consumer Sentiment USUMSP=ECI surged 15.9% to 60.5, blasting past the more demure 2.5% improvement analysts expected.

It was the most optimistic reading since February.

Survey participants' assessment of current conditions improved by 8.1%, while near-term expectations jumped 21.9%.

Noting that the improvement was "unanimous across the distributions of age, income, wealth, political party, and geographic region," Joanne Hsu, Director of UMich's Surveys of Consumers writes "all five index components rose, with a particularly steep increase for short and long-run expected business conditions, consistent with a perceived easing of pressures from tariffs."

Still, "despite this month’s notable improvement, consumers remain guarded and concerned about the trajectory of the economy," Hsu adds.

Near- and long-term inflation expectations re-entered the earth's orbit, with respondents seeing annual inflation at 5.1%, down 1.5 percentage points from May's final reading, but 2.3 percentage points hotter than 2.8%, or Wednesday's core CPI reading.

Five-year inflation expectations shaved off a scant 0.1 ppts to 4.1%.

"Consumers’ fears about the potential impact of tariffs on future inflation have softened somewhat in June," Hsu says. "Still, inflation expectations remain above readings seen throughout the second half of 2024, reflecting widespread beliefs that trade policy may still contribute to an increase in inflation in the year ahead."

While consumer inflation expectations are not reliable predictors of the future path of price growth, Powell & Co pay attention to it because it can affect behavior, prompting consumers to push purchases forward to avoid price hikes, unintentionally boosting demand and becoming a self-fulfilling prophecy.

And finally, it's worth noting that there's often a disconnect between what consumers say and what they do. PCE outlays often surge on months with dour confidence readings.

(Stephen Culp)

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