Affected by persistently elevated prices and interest rates, US consumer sentiment weakened further in October, dropping to its lowest level in five months. At the same time, consumers' expectations for future inflation rose, with both short-term and long-term inflation expectations reaching new highs since May, underscoring how inflationary pressure continues to erode the purchasing power of American households.
According to survey data released by the University of Michigan on Friday, the final reading of the US consumer sentiment index for October fell to 48, down from 48.1 in September. Although the index has weakened for consecutive periods, the final reading improved from the preliminary figure and came in above all economists' forecasts in a Bloomberg survey. On inflation expectations, consumers expect prices to rise 4.7% over the next year, up from 4.6% in September; the average annual inflation expectation for the next five to ten years reached 3.5%. Both indicators climbed to their highest levels since May of this year.
Joanne Hsu, director of the University of Michigan consumer survey, said in a statement that after five consecutive years of inflation above the Federal Reserve's target level, consumers' short-term and long-term inflation expectations have both risen in recent months, suggesting that high inflation expectations may gradually become entrenched and pose a potential risk to the US economy. US consumer sentiment has remained under pressure, mainly affected by factors such as persistently high inflation, weak hiring activity and mortgage rates holding at high levels. Although US mortgage rates have recently pulled back, overall financing costs remain at a relatively high level, continuing to suppress residents' demand for home purchases and other large-ticket consumption. At the same time, US gasoline prices remain noticeably above $4 per gallon, further adding to the burden of household living costs.
Over the past few months, US price increases have outpaced wage growth, further squeezing households' real purchasing power. Data released last week showed that US consumer prices in September rose at the fastest pace in five months, reflecting the continued inflationary push from higher energy and other living costs. As the US midterm elections enter their final stretch, the cost-of-living issue has also become a core economic topic of concern for voters.
Hsu noted that regardless of political affiliation, US consumers generally believe that inflation poses a far greater risk to the economy over the next year than unemployment. The survey showed that consumer sentiment among both Democratic and Republican supporters improved in October, but sentiment among independent voters fell for the third consecutive month, reflecting differences in views on the economic outlook among different political groups. Notably, high interest rates are exerting a more pronounced dampening effect on consumers' willingness to buy big-ticket goods. Data showed that the durables buying conditions index fell in October to its lowest level on record. The report noted that rising interest rates and heightened consumer concerns about the affordability of goods were the main reasons driving the indicator lower.
At the same time, nearly 70% of surveyed consumers expect interest rates to rise further over the next year, the highest share in more than three years. This result indicates that although the market continues to focus on the Federal Reserve's future monetary policy direction, ordinary consumers remain broadly worried that financing costs may increase further, adding to the burden of housing, autos and other large expenditures. Among the sub-indices, the index measuring consumers' views of current economic conditions fell to its second-lowest level in history, highlighting US households' dissatisfaction with the current economic environment. However, the consumer expectations index, which gauges the future economic outlook, improved for the first time since July, indicating that although consumers remain pessimistic about current conditions, their views on future economic development have shown some signs of stabilization.
Overall, the October US consumer sentiment data reflects that persistent inflationary pressure and high interest rates remain the main factors affecting residents' willingness to spend. Although consumers' expectations for the future economic outlook improved slightly, rising prices, pressure on real incomes and high borrowing costs are still limiting households' spending capacity. Of particular note, the simultaneous rise in short-term and long-term inflation expectations may further increase the difficulty for the Federal Reserve in controlling inflation. If consumers continue to expect prices to rise rapidly in the future, inflation psychology may gradually become entrenched and affect future consumption decisions and price trends. The University of Michigan consumer survey covered the period from September 22 to October 19.
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