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Consumer Sentiment Gauge Edges Up Less Than Anticipated in July as Inflation Expectations Ease

A monthly gauge of consumer sentiment edged up in July from the month before but missed expectations as survey respondents indicated less concern about inflation.The University of Michigan’s flash consumer index, an indicator of the future course of the national economy, posted a 98.4 reading for the first half of the month, up from the final June reading of 98.2, but below Econoday’s consensus for 98.6.

“Perhaps the most interesting change in the July survey was in inflation expectations, with the year-ahead rate slightly lower and the longer term rate moving to the top of the narrow range it has traveled in the past few years,” said Richard Curtin, chief economist at the university’s Surveys of Consumers.

“Consumer confidence remains high, likely helped by strength in the equity market as well as the labor market,” said Jim O’Sullivan, chief economist at High Frequency Economics. “Inflation expectations are showing little net change, but that is a bit stronger than implied by the data in June.”

Jon Hill, rates strategist at BMO Capital Markets, said the survey’s “inflation component was probably welcome news for a (Federal Open Market) Committee nervous that depressed inflation expectations could become a self fulfilling trap. Of course, these surveys are fraught with their own methodological issues, so we’d caution against believing the FOMC’s out of the woods just yet.”

The university said the current economics index slid 0.7% from the end of last month to 111.1 while the consumer expectations index rose 0.9% to 90.1

“Confidence high and stable; inflation expectations steady,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Therefore, the key constraint on the rate of growth of consumption is the pace of real income growth, not sentiment.”

Curtin said the survey showed that as inflation expectations rise, “signifying that consumers view higher inflation as a threat to economic growth,” Curtin said. “Higher inflation was related more frequently to rising interest rates and was associated with higher unemployment expectations.”

That index, according to the university, was at 111.7 with no inflation but fell to 92 when inflation is between 1% and 3%. Inflation above 4% brings the reading down to 71.5.

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