Consumer Sentiment Improves Modestly In February

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Improvement in views of the current economy offset a dip in future expectations.

Consumer sentiment ticked up modestly in February, even as Americans grew a little less optimistic about future conditions, according to the monthly survey from the University of Michigan released on Friday.

The overall index rose 1.5 points to 66.4. While the reading of current economic conditions rose by 6.1%, the expectations index fell by 0.6%.

It was the third month of improvement, but the overall index is still off 14% from two years ago.

“Recent developments in the economy, both positive and negative, have led to mixed attitudes among consumers with little net change in February,” said Joanne Hsu, the survey’s director.

“Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22% below its historical average since 1978,” Hsu added. “Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead.”

Inflation expectations worsened in the short term while holding steady longer-term.

“Uncertainty over short-run inflation expectations ticked up recently and continues to be notably elevated, indicating the potential for continued volatility in expected year-ahead inflation,” Hsu said. “In contrast, uncertainty over long-run inflation receded in recent months, though the uncertainty stands well above averages over the last 20 years.”

Next week, the Labor Department will report the consumer price index for January and that could well show a slight increase in the monthly rate of inflation even as the annual pace falls due to comparisons from a year ago and also the recent shift upward in energy prices.

“I do see a lot of resilience” in the economy, says Sevin Yeltekin, dean of the Simon Business School at the University of Rochester. “The job market is still very tight and both companies and households have a good liquidity state.”

Still, she thinks the Federal Reserve is not likely to waver from its current path of taking interest rates higher or for longer than perhaps markets anticipate in its battle against inflation.

“He was blamed for not fighting inflation,” early enough, Yeltekin says, “he doesn’t want to take his foot off the brake.”