US Consumer Sentiment Preview: Higher prices at the pump could irritate consumers, hit markets
Aa
Share
- Economists expect the University of Michigan's Consumer Sentiment Index to marginally decline in August.
- The long-term inflation expectations component may have exceeded estimates due to rising Oil prices.
- Markets may slide in response to worrying data, but this may serve as a buying opportunity.
Even a mere 0.1% surprise in a sub-component of a soft indicator matters – if it is related to inflation. The publication also has the last word of the week, giving it an additional impetus.
Here is a preview of the University of Michigan (UoM) preliminary Consumer Sentiment Index for August, and its all-important 5-year Consumer Inflation Expectations, due out on August 11, at 14:00 GMT.
Consumer Sentiment, politics and the one component that Fed Chair Powell mentions
The University of Michigan's Consumer Sentiment Index earned its reputation through years of publications and also thanks to its early release. The preliminary index is out in the middle of the current month, while the competing Conference Board's figure is out only at the end of the month. That gives UoM an advantage.
On the other hand, sentiment is heavily impacted by politics. Democrats have been more optimistic than Republicans since Joe Biden entered the Oval Office, while the opposite was true under his predecessor. General news media cares about sentiment and politics, but markets look away.
What investors do care about is what the Federal Reserve watches. Fed Chair Jerome Powell and his colleagues occasionally mention long-term inflation expectations as reflected in private-sector surveys. In one instance, Powell singled out the 5-year Consumer Inflation Expectations from UoM.
An increase in expectations means consumers may buy more now in fear of higher prices later on – making their expectations a self-fulfilling prophecy. That has not happened yet. In the past few months, it has been hovering around 3%, above the Fed's desired 2% level, but far from alarming.
UoM 5-year Consumer Inflation Expectation. Source: FXStreet
How University of Michigan inflation expectations are set to move the US Dollar
While the Consumer Price Index (CPI) is the king of market volatility, the importance the Fed gives the inflation expectations to the figure and the release just before markets close triggers high volatility.
After hitting exactly 3% last month, I expect a small uptick in long-term inflation expectations. Why? Consumers do not conduct in-depth calculations on future price developments before answering a surveyor's phone call. Their answer about future inflation comes from their recent experiences.
The most significant factor impacting inflation expectations comes from gasoline stations. The price at the pump is blasted on big billboards, and any price change shapes the mood. Global Oil prices have risen in the past two months, reaching pumps across America. That is why I expect an increase in inflation expectations.
Gas prices are what Americans see with their eyes, and it has a bigger impression than headlines about falling inflation.
The US Dollar may get a small uplift from a result of 3.1% or 3.2%, which I expect. A surprising drop in long-term inflation expectations to 2.9% or 2.8% would weigh on the Greenback.
Any move will likely be short-lived. CPI data and comments from Fed officials – speaking non-stop since the latest decision – have more impact than the survey. While Consumer Sentiment is a forward-looking figure, CPI is hard data documenting what happened, not a survey.
Final thoughts
The UoM Consumer Sentiment should's inflation expectations are important, but their impact is short-lived. In case US CPI misses estimates while the UoM figures beat them, the US Dollar's rise would likely be temporary. That would imply a trading opportunity.
