US Consumer Sentiment Falls on Deteriorating Inflation, Labor Outlook

U.S. consumer sentiment unexpectedly softened in August, as the public anticipates inflation and unemployment to worsen in the future, according to new data from the University of Michigan Surveys of Consumers, released on Aug. 15.

The preliminary August consumer sentiment index fell to 58.6, down from a final reading of 61.7 in July. This came in below the consensus forecast of 62 and represented the first decline in four months.

The index for current conditions dropped to 60.9 from 68, and the expectations metric fell to 57.2 from 61.7. Both readings are down by 0.7 percent and 20.7 percent, respectively, from a year ago.

“This deterioration largely stems from rising worries about inflation,” Joanne Hsu, director of the Surveys of Consumers, said in a statement.

Consumers, Hsu says, are increasingly concerned about their current purchasing power. Buying conditions for durables declined by 14 percent—the lowest reading in a year—mainly because of higher prices, she noted.

“Overall, consumers are no longer bracing for the worst-case scenario for the economy feared in April when reciprocal tariffs were announced and then paused,” Hsu stated. “However, consumers continue to expect both inflation and unemployment to deteriorate in the future.”

The year-ahead inflation expectations rose to 4.9 percent from the five-month low of 4.5 percent in July. The five-year outlook also climbed to 3.9 percent, up from 3.4 percent in the previous month.

Despite the uptick, both short- and long-term projections remain below their highs observed in April and May.

Receding consumer sentiment did not prevent shoppers from opening their wallets.

In July, retail sales increased by 0.5 percent following an upwardly adjusted 0.9 percent increase in June.

Additionally, two categories sensitive to tariffs—apparel and automobiles—increased from a year ago. Receipts at clothing stores and motor vehicle and parts dealers jumped at a seasonally adjusted pace of 5 percent year over year.

The retail sales control group—a key metric that feeds into gross domestic product calculations—climbed by 0.5 percent, “suggesting recession risks remain minimal,” says LPL chief economist Jeffrey Roach.

“Adjusted for inflation, retail sales rose 0.3 percent and indicated the consumer is successfully handling the trade uncertainty,” Roach said in a note emailed to The Epoch Times.

“Recession risks remain low.”

Consumer spending accounts for two-thirds of economic activity and is a critical measure of the broader economy’s health. Following a 0.5 percent contraction in the first quarter, the U.S. economy rebounded by 3 percent. Early estimates, including from the Federal Reserve Bank of Atlanta’s GDPNow Model and the New York Fed Staff Nowcast, point to at least 2 percent growth.

Wrestling With Inflation

Consumer sentiment and retail sales data were released as new inflation figures suggest that price pressures may be building in the U.S. economy.

A trio of inflation reports were released for July this week—the consumer price index (CPI), the producer price index (PPI), and trade prices—and they presented a mixed picture of the tariff story.

According to the Bureau of Labor Statistics, import prices advanced by 0.4 percent, higher than the market estimate of a flat reading. Prices for imports were also down by 0.2 percent in the 12-month period.

Since President Donald Trump’s global tariffs, trade data have indicated that foreign exporters have been absorbing at least some of the costs driven higher by the tariffs. Companies abroad will respond to higher tariffs by lowering prices and sacrificing profit margins to maintain market share.

Import prices fell by 0.1 percent in June and 0.4 percent in May.

But whether exporters and domestic retailers can continue to absorb higher tariff-driven cost pressures remains to be seen.

A recent Goldman Sachs analysis found that businesses are absorbing around 64 percent of the costs, while exporters have eaten approximately 14 percent. Consumers have carried about 22 percent of the costs, but the bank expects this number to climb to 67 percent by the year’s end.

In the meantime, as market watchers digest the latest batch of figures, it will be challenging to determine whether tariffs will fuel persistent inflation or lead to a one-time price adjustment.

Shoppers are facing an overall average effective tariff rate of 18.6 percent, the highest since 1933, according to The Budget Lab at Yale.

Tom Ozimek contributed to this report.