Key Points

  • The University of Michigan's consumer sentiment index for June rebounded from the historic low recorded in May, mainly due to easing tensions in the Iran war situation, which led to a decline in gasoline prices.
  • The index rose 10% month-over-month in June, with improvements in sentiment across all income groups and political affiliations. One-year inflation expectations edged down to 4.6% from 4.8% in May, but remain significantly higher than the 3.4% seen in February, before the outbreak of the Iran war.
  • Joanne Hsu, director of the University of Michigan survey, said that while consumers welcomed the recent drop in gasoline prices, persistently high overall prices continue to strain household budgets, and concerns about inflation eroding living standards over the next year remain strong.

Deeper Insights

Data released Thursday by the Bureau of Economic Analysis at the U.S. Department of Commerce showed that the Personal Consumption Expenditures (PCE) price index rose 0.4% month-over-month and 4.1% year-over-year in May, the fastest annual pace in three years. Price increases for fuel and other goods were more than double the Federal Reserve's 2% target inflation rate.

Fuel prices have eased since mid-June, when the United States and Iran reached an agreement on a framework to end the war. According to AAA, the average price of regular gasoline has fallen 15% over the past month, from $4.49 to $3.90 per gallon.

"Americans now have hope that the worst of the inflation crisis is behind us," Heather Long, chief economist at Navy Federal Credit Union, said in a report. "Their judgment may be correct," she added. She believes "inflation likely peaked in May, when the energy shock from the Iran war hit consumers hardest." However, she also noted that "the key question is how quickly inflation cools," and cautioned that price pressures in electricity, healthcare, and some groceries remain elevated. Long expects "consumer sentiment to continue recovering this summer, but it will still take a long time to return to near-'normal' levels."

The University of Michigan survey showed that consumers' expectations index for business conditions over the next five years rose sharply by 16% in June. Additionally, households' assessments of their personal finances rose 9% month-over-month, and expectations for their financial situation over the next year rose 15%. Hsu noted that despite these improvements, the readings remain well below levels seen at the start of the year. She also said that for the third consecutive month, more than half of consumers spontaneously mentioned that high prices are dragging on their personal finances.

Hsu said the consumer sentiment index remains in an "unfavorable range," 13% lower than in February, before the war, and 20% lower than a year ago.