Consumer Sentiment Dips as Inflation Expectations Remain Flat

The bifurcation in consumer spending — between higher-income and lower-income individuals and households — looks set to widen.

And in the meantime, as detailed in the University of Michigan’s Consumer Sentiment Index, the prevailing outlook on the economy seems to have soured a bit.

Dueling data reports Friday showed that inflation’s pace continued to moderate in July, but consumers’ overall expectations on prices remain relatively unchanged, which means their views on inflation center around the fact that prices are going to remain stubbornly high.

The overall reading from the University’s survey came in at 66.4 in July, down from 68.2 in June.

As for gap, as detailed by Joanne Hsu, director of the surveys:

“Continued strength in consumer spending is consistent with the fact that sentiment among wealthy and high-income consumers — those with the most purchasing power — has climbed sharply over the past two years. These consumers generate a disproportionate share of spending and have been supported not only by rising asset values and incomes, but also growing confidence in the economy as well. In contrast, the burden of high prices continues to drag down sentiment for less wealthy consumers.”

PYMNTS Intelligence data has illustrated that for lower-income consumers, paying for food eats up 25% of income, housing another 37%, and their monthly bills another 13%. Altogether, that accounts for 72% of their monthly income.

Hard to Close the Wealth Gap

There’s a “wealth gap” noted by the survey, as individuals who own stocks tend to feel relatively better off than those who do not. “Consumers with the largest stock holdings have seen a 71% increase in sentiment since June 2022, in contrast to only an 11% gain for those without stocks,” per the survey.

There’s not all that much money, we note, to go out and buy stocks, to beef up the portfolio — or by extension, build up the nest egg. There’s not all that much leeway to winnow down this wealth gap. As noted here, it may be the case that consumers are still spending on experiences, but at the same time, PYMNTS Intelligence data found that consumers deplete 67% of all available savings, on average, every four years. Among paycheck-to-paycheck consumers, the average recurrence drops to once every 2.5 years.

Consumers are still feeling the burden of high prices, despite the fact that inflation expectations are ticking down. The survey noted that year-ahead inflation expectations fell for the second straight month and now stand at 2.9%. The range for those expectations, historically, has been 2.3% to 3%, and so the latest reading is just about at the “high.” Long-run inflation expectations came in at 3.0%, unchanged from June, and above the long term range of 2.2% to 2.6%.

Separately, the Friday release of the Personal Consumption Expenditures (PCE) Index showed that in June, expenditures rose 0.3% in the month of June, outpacing disposable personal income growth of 0.2% in the same month over month period. As spending outstrips income growth, pressures on the wallet only grow more pronounced.

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