Consumer Sentiment Drops In August ? And Inflation Fears Return

After two solid months of improving mood among U.S. consumers, sentiment unexpectedly cooled in August as concerns over inflation reemerged and weighed heavily on household confidence.

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The University of Michigan's Consumer Sentiment Index fell to 58.6 in August, down from 61.7 in July and missing expectations of a rise to 62. This marked the first decline in four months, dropping the index to its lowest level since May.

The drop was primarily driven by a sharp decline in how Americans feel about their current financial situation. The Current Conditions subindex slid to 60.9 from 68, significantly below forecasts of 67.9. Meanwhile, the Expectations subindex remained more stable, dipping slightly from 52.7 to 52.2, yet still came in above the expected 56.5.

Inflation Expectations Rise Sharply

Worryingly for the Federal Reserve, inflation expectations reversed course and moved higher in both the short and medium term.

"This deterioration largely stems from rising worries about inflation," said Joanne Hsu, director of the Surveys of Consumers.

Year-ahead inflation expectations jumped from 4.5% in July to 4.9% in August.

More importantly, the 5-year ahead expectations ? a key measure watched by the Fed to assess long-term credibility ? climbed from 3.4% to 3.9%. Both figures remain well above the Fed's 2% target.

Durable goods purchases fall the most in a year

Buying conditions for big-ticket items such as cars and appliances tumbled 14%, marking their lowest point in a year. Consumers cited high prices as the main reason for holding back.

On personal finances, sentiment showed a mixed picture: current financial conditions worsened modestly, while expectations for future finances improved slightly, reflecting a modest lift in income projections.

Still, the broader consumer narrative has shifted.

Compared to April, when recession fears surged following tariff threats, Americans are no longer preparing for the worst. But worries about rising prices and a softening labor market continue to cloud the outlook.

Market Reactions

Market reactions to the University of Michigan consumer data were broadly muted, with major equity indices continuing to trade broadly flat for the day. Investors remained cautious ahead of the upcoming Trump?Putin meeting in Alaska.

In commodities, however, precious metals saw modest gains amid rising stagflationary worries.

Gold ? as tracked by the SPDR Gold Trust ? edged up 0.1% to $3,340 per ounce, while silver reversed earlier losses to trade at $37.90.

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