US Consumer Sentiment Sinks to 48.1 as Inflation Fears Rise

American consumers ended September in their gloomiest mood in four months. The University of Michigan’s final consumer sentiment index for the month came in at 48.1, down from 51.7 in August, according to data released on Friday, 25 September. The reading was marginally better than the preliminary estimate of 47.8 and the 47.5 economists had forecast, but it confirmed a sharp deterioration in household confidence.

More worrying for policymakers, consumers now expect prices to rise faster. Year-ahead inflation expectations climbed to 4.6 per cent, the highest since June, while long-run expectations for the next five years edged up to 3.4 per cent from 3.3 per cent.

A broad-based slide

The index fell 7 per cent from August and 12.7 per cent from a year earlier, when it stood at 55.1. It is now about 42.5 per cent below its long-run average of 83.6, according to Advisor Perspectives.

The decline was led by expectations about the future. The expectations index dropped to 46.3 from 51.5, a fall of about 10 per cent, while the current conditions index eased 1.9 per cent to 50.9. Joanne Hsu, director of the Surveys of Consumers, said views of both current and expected personal finances “weakened about 10%.”

The survey also revealed where the pain is concentrated. About 55 per cent of respondents said high prices were hurting their finances, up from 53 per cent in August and 44 per cent a year ago. Some 31 per cent mentioned gasoline prices without being asked, and 35 per cent raised tariffs, up from 24 per cent in July. Only 8 per cent expect their incomes to grow faster than inflation.

“Consumers do not believe that relief from high gas prices is on the horizon,” Hsu said.

The gloom crosses party lines. Since January, sentiment has fallen 20 per cent among Republicans and 13 per cent among Democrats.

Oil and interest rates bite

Two forces are weighing on households. The first is energy. With the conflict involving Iran disrupting supplies through the Strait of Hormuz, crude oil has traded above $100 a barrel, pushing up petrol prices across the United States.

The second is borrowing costs. The Federal Reserve raised its benchmark rate by 25 basis points to a range of 3.75 to 4.00 per cent this month, its first increase since July 2023. Fed Chair Kevin Warsh said at the time that inflation was “too high, and has been for too long.” Mortgage rates have climbed above 7 per cent, and the survey noted that interest rates have overtaken prices as the leading concern for prospective home buyers.

Why it matters for markets

Rising inflation expectations are exactly what central bankers fear most. If households and businesses come to expect higher prices, they may demand bigger wage increases and raise their own prices, making inflation harder to bring down. The 4.6 per cent year-ahead reading strengthens the case for the Fed to tighten further. Markets are pricing a roughly 66 to 70 per cent chance of another 25 basis point increase at the next meeting, according to Trading Economics.

For companies, weak sentiment is an early warning on spending. Consumer spending accounts for the bulk of US economic activity. Retailers, restaurant chains, carmakers and travel companies will watch closely for signs that gloomy moods are turning into tighter wallets. Discretionary categories are usually the first to suffer.

For bond investors, the combination of weak confidence and rising inflation expectations is uncomfortable. It raises the risk of stagflation, in which growth slows while inflation remains elevated, a scenario that limits the Fed’s ability to support the economy.

The India angle

For India, a softer American consumer has direct implications. The United States is India’s largest export market, and categories such as garments, home textiles, gems and jewellery, and consumer goods depend heavily on US discretionary spending. A slowdown in US retail demand could translate into smaller orders for Indian exporters in the coming quarters.

A more hawkish Fed also matters. Higher US interest rates tend to draw capital away from emerging markets, adding pressure on the rupee, which the Reserve Bank of India has been defending through dollar sales.

What happens next

The next major data point is the August reading of the personal consumption expenditures price index, the Fed’s preferred inflation gauge, due on 30 September. A hot reading would reinforce expectations of another rate increase. Oil prices will also be decisive: any durable easing linked to diplomatic progress with Iran would lift both sentiment and the inflation outlook.

Until then, the Michigan survey offers a clear message. American households feel squeezed by prices at the pump and by the cost of credit, and they are not yet convinced that relief is coming.