Merk Investments: University of Michigan Consumer Sentiment (May-Final)
The University of Michigan’s gauge of consumer sentiment declined for the fourth straight month to a sixteen year low of 59.8. The economic conditions and outlook subcomponents also fell to 73.3 and 51.1 respectively. The primary catalyst, behind the continued bearish reading in consumer sentiment is the rising cost of domestic gasoline and weak prospects in the labor market.
Perhaps more interesting are the developments in how the public is forming inflation expectations. The public now expects prices to rise 5.2% over a one-year time horizon and 3.4% over a five-year time interval. The public has moved out ahead of the market, which expects modest inflation of 2.5% over the next year and 2.4% over the next five. In our estimation, a disconnect may be forming between what the market thinks and the true pricing condition that the public faces. In the coming weeks we would not be surprised to see the yield on ten year treasuries begin to move up, not due a the virtues of a economic recovery, but due to the emerging reality that inflation is seeping into the perceptions of the consumer.
The Fed has been making the case that inflation expectations remain anchored. In our estimation, the developments across just about every estimate of public expectations indicate that consumers are in the process of reassessing the Fed’s commitment to price stability. Given that the real change in core prices has yet to reflect the obvious changes in the pricing environment underway in the economy, the inflation expectations estimates by the Conference Board and the University of Michigan may be a much better gauge of what is can fairly be described as very fluid environment for prices in the economy.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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