Consumer Sentiment Slips to 46.3 as CPI Inflation Worries Persist

American households are in a gloomier mood than economists expected, and they are more worried about prices than they were a month ago. The University of Michigan’s index of consumer sentiment came in at 46.3 in its October reading, down from 48.1 in September and below the 47.5 that economists had forecast, according to Investing.com’s report on the survey. Expectations for inflation moved the wrong way as well: households now anticipate price increases of 4.7 percent over the next year, up from 4.6 percent, and 3.5 percent over the longer run, up from 3.4 percent.

The monthly movements are small, but the level of sentiment is low and the inflation numbers sit above what the survey recorded earlier this year. For anyone tracking CPI inflation, the survey is a reminder that how households perceive prices can diverge from what the monthly index records.

What the survey found

The one-year inflation expectation of 4.7 percent was slightly below the 4.8 percent that forecasters had projected, so the reading was a touch better than expected on that count even as it rose from September. The longer-run measure moved up by a tenth to 3.5 percent. Survey director Joanne Hsu said the one-year figure was well above the 3.4 percent level seen in February.

Hsu pointed to a divide within the survey. Sentiment fell steeply among less well-off households and among those with smaller stock portfolios, groups she described as having fewer resources to weather increases in prices. She also said that frustration over the cost of living continues to mount, with consumers across the political spectrum believing that the trajectory of the economy has weakened since the start of the year.

That second observation matters for the reading of the index. Sentiment surveys are often split along partisan lines, so a decline that appears among respondents of every political persuasion carries more information than one that tracks the election calendar. It points toward household finances, and prices in particular, as the source of the deterioration.

Why prices dominate the mood

The price data that households are reacting to are not abstract. The Bureau of Labor Statistics reported in September that consumer prices rose 0.4 percent in August on a seasonally adjusted basis and 3.4 percent over the 12 months ending in August. Energy rose 2.1 percent in the month and 16.3 percent over the year, with gasoline up 3.9 percent for the month and 27.4 percent over the year. Core prices, which exclude food and energy, rose 0.3 percent in the month and 2.4 percent over the year. Food prices were up 2.7 percent on the year and shelter up 3.0 percent.

So the official measure of annual inflation is 3.4 percent, a figure the Investing.com report also cites, while households in the survey expect 4.7 percent over the next year. That gap is consistent with what people experience at the pump. Gasoline is the price consumers see most often and most visibly, and a 27.4 percent annual increase leaves a strong impression, even when the broader basket is rising more slowly. The core measure of 2.4 percent is lower than any of the expectations in the survey.

The report ties the energy increase to the war in the Middle East, which it says has now lasted more than half a year and has squeezed global energy supply flows out of the region, raising gasoline and diesel prices. The BLS data do not assign causes, but the direction of the energy numbers is clear.

Policy and the labor market

Investing.com also notes that the Federal Reserve raised interest rates in September for the first time since 2023, and that some people worry about further tightening. Higher rates add to the cost of borrowing for households already stretched by higher prices, and a rise in the longer-run expectations measure is the kind of change that central bankers watch closely.

Hiring has also slowed. The Employment Situation report for September, published on October 2, showed nonfarm payrolls rising by 29,000 with the unemployment rate at 4.2 percent. July and August were revised down by a combined 60,000, so that July now shows a decline of 10,000 and August a gain of 133,000. Average hourly earnings rose 3.0 percent over the year, below the 3.4 percent rate of consumer price inflation in August, which means real pay is falling slightly. With wage growth trailing prices and job growth slowing, a decline in sentiment among households with fewer resources follows from the numbers.

Spending has held up

The survey’s weakness has not so far shown up in consumer spending. Retail sales rebounded sharply in August, according to the report. That disconnect between mood and behavior is familiar. Sentiment measures have been low for stretches in which people kept spending, and the relationship between the survey and actual purchases is loose month to month.

What the survey does capture is the margin of safety. Households that report that their finances are under strain can keep spending for a while by drawing on savings or credit, but not indefinitely. If sentiment among lower-income households keeps falling and wage growth stays below inflation, spending in those groups is the likeliest to give way first.

What to watch

Affordability is a prominent theme in the coming midterm elections, according to the report, and the sentiment numbers reinforce why. The next reads on prices will come with the September consumer price report, due October 14, and the September producer price report, due October 15, followed by the November sentiment survey. If gasoline prices stabilize, the inflation expectations in the survey should ease along with them; if energy costs rise again, the 4.7 percent one-year figure could move higher. The long-run measure of 3.5 percent is the one to follow most closely, since it reflects whether households believe the current burst of inflation will last.