Consumers See Inflation Falling as Long-Term Expectations Drop to 3.3%

The latest University of Michigan consumer sentiment survey offered a small but encouraging sign for the economy. While Americans remain pessimistic about current conditions, they are becoming more optimistic about the future, and long-term inflation expectations continue to move lower.

On a recent CNBC appearance, Rick Santelli walked through the final June survey, highlighting the number that likely matters most to investors and the Federal Reserve: long-term inflation expectations fell to 3.3%, the lowest reading since March. That suggests consumers increasingly believe inflation will continue moderating, giving policymakers more confidence that price pressures are moving in the right direction.

Consumers Feel Better About the Future, Not the Present

The final June University of Michigan Consumer Sentiment Survey showed Americans remain downbeat about the economy today, but are becoming more optimistic about where it is headed.

The survey breaks sentiment into two main components. The Current Conditions Index, which measures how consumers feel about the economy today, slipped to 47.7 from 48.4 in the preliminary June reading. Meanwhile, the Consumer Expectations Index, which measures how households expect the economy to perform over the next six months, rose to 50.7 from 49.3, marking its first reading above 50 since March.

While there is no official cutoff, a reading of 50 is widely viewed as an important psychological threshold. Values below 50 suggest broad pessimism among consumers, while readings above 50 indicate improving optimism. June’s data suggests Americans are still unhappy with current economic conditions but are becoming more hopeful about the months ahead.

The survey also showed inflation expectations continuing to improve. Consumers expect prices to rise 4.6% over the next year, down from 4.8% two months ago. Longer-term inflation expectations, which measure expected inflation over the next five to ten years, fell to 3.3% from 3.4% in the preliminary June survey, their lowest level since March.

Why Lower Inflation Expectations Matter to the Fed

One of the Federal Reserve’s biggest goals is keeping long-term inflation expectations under control. If consumers and businesses believe inflation will stay high for years, they are more likely to behave in ways that keep inflation elevated. Workers might demand higher wages to offset expected price increases, while businesses might raise prices because they expect their own costs to rise. Therefore, if people expect inflation to lower, it creates an environment where it’s easier to cut interest rates.

The latest University of Michigan survey suggests that cycle may be easing. Long-term inflation expectations fell to 3.3%, the lowest level since March, indicating consumers are becoming more confident that inflation will continue cooling.

Gas Prices Could Determine What Happens Next

Gas prices have dropped from $4.50 in mid-May to $3.91 by late June. Six consecutive weeks of decline at the pump shape what people tell survey takers about future prices.

The hard inflation data has not fully cooperated. The Consumer Price Index reached 334.0 in May, up from 321.4 a year earlier. Core PCE, the Fed’s preferred gauge, climbed to 130.08 in May from 126.12 a year prior. Real average hourly earnings sit at $11.24, slightly below the $11.32 reading from the same month last year. Wages are not keeping pace, which is why current conditions in the survey keep slipping.

Key Takeaways

June’s survey doesn’t signal that inflation has been defeated or that rate cuts are imminent, but it does point in a constructive direction. Consumers are becoming more optimistic about the months ahead, while both short- and long-term inflation expectations continue to ease from recent highs. Whether that trend continues will depend on upcoming inflation data, labor market strength, and everyday prices like gasoline, which heavily influence how consumers view the economy.