Inflation’s steady slowdown in recent months has kept Americans feeling optimistic about the future.
Consumer sentiment tracked by the University of Michigan rose 13% in July, the second straight month of improvement and the biggest over-month gain since 2006, according to a preliminary reading released Friday morning. The index reached its highest level since September 2021.
Meanwhile, the report showed that consumers’ expectations for inflation rates remained at their lowest levels since early 2021. Consumers see inflation rates of 3.4% in the year ahead, and while that’s well below last year’s 5.4% peak, it’s slightly higher than the previous reading.
“The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets,” said Joanne Hsu, director of the Surveys of Consumers, in a release Friday.
The survey showed a broad improvement across all of its components, “led by a 19% surge in long-term business conditions and 16% increase in short-run business conditions,” according to the release.
“The recent fall in gas prices and rise in stock prices are boosting consumers’ confidence,” wrote Kieran Clancy, senior US economist at Pantheon Macroeconomics, in an analyst note.
Consumer spending, which accounts for about two-thirds of economic output, has weakened somewhat in recent months as the economy slowed. Spending picked up by 0.1% in May, a slower pace than April’s 0.6% gain, according to figures from the Commerce Department. And when adjusting for inflation, consumer spending was flat.
Despite the Federal Reserve’s most aggressive rate-hiking campaign in decades, which was put on hold last month, the labor market has held remarkably steady while inflation has slowed, raising the odds of a so-called soft landing — or a scenario in which the Fed succeeds at bringing down inflation without throwing the economy off a cliff. Some Fed officials are confident about that possibility becoming a reality.
“I feel like we are on a golden path of avoiding recession,” Chicago Fed President Austan Goolsbee told CNBC last week.
Headed for a soft landing?
Still, Americans face a tough economic landscape in the months ahead as they reckon with debt they’ve racked up in the past year and the resumption of student loan payments, though the Biden administration recently announced that 804,000 borrowers will have their student debt wiped away, totaling $39 billion, in the coming weeks.
At the same time, US consumers have proven to be exceptionally resilient despite the odds, so a recession later this year is anything but assured. Some economists have pushed back their expectation of a recession, including Bank of America CEO Brian Moynihan and JPMorgan Chase CEO Jamie Dimon.
On an earnings call with journalists Friday, Dimon said a lot of uncertainty about the economy remains even though inflation has slowed in recent months, improving odds of a soft landing.
“I don’t know if it’s going to lead to a soft landing, a mild recession or a hard recession,” Dimon said in response to a question from CNN on whether inflation’s slowdown has made him more optimistic.
While the inflation fight hasn’t translated into a recession just yet, the Fed is still laser-focused on successfully defeating inflation at all costs. Fed Chair Jerome Powell has frequently said he believes the dangers of permanently higher inflation outweigh the pain of an economic slump.
Longer-run inflation expectations remain “well anchored,” Powell has said, meaning consumers expect inflation will eventually settle back down to a level they’re historically used to. But Fed officials cautioned at last month’s meeting that the longer inflation remains elevated, “the greater the risk of inflation expectations becoming unanchored,” according to the minutes from that meeting.
