Consumer Confidence Slides as Middle East Inflation Pressures Deepen
U.S. consumer confidence dropped in May as rising oil prices from the Iran conflict drive up inflation to 3.8%, with two-thirds of consumers cutting spending. The Fed is unlikely to cut rates, and many experts see rate increases as more probable by year-end.
What Happened
The Conference Board's consumer confidence index fell 0.7 points to 93.1 in May, down from an upwardly revised 93.8 in April, with the present situation index declining by 3.2 points. Two-thirds of consumers said they were cutting back on spending in May, either buying fewer items or delaying expensive purchases.
Why It Matters
The strength of the consumer is a key question for the economy, as the Federal Reserve is unlikely to lower borrowing costs by cutting interest rates with inflation running well above the central bank's 2% goal, at 3.8% in May, with inflation being driven by the rising price of oil since the Feb. 28 bombing of Iran by the U.S. and Israel. The strength of the consumer is a key question for the economy, as the Federal Reserve is unlikely to lower borrowing costs by cutting interest rates with inflation running well above the central bank's 2% goal, at 3.8% in May.
Fed and Market Outlook
The Fed is likely to remain on hold for the rest of the year, as the inflation backdrop makes it difficult to justify rate cuts while the hurdle for rate hikes also remains high. Despite present weakness, the expectations index—a forward-looking assessment of income, business and labor market conditions—rose by 1 point to 74.4, suggesting Americans retain some optimism about future conditions.
Income and Demographics
Confidence moved up among those aged 35-54 but trended downward for older and younger consumers, both month over month and on a six-month moving average basis, while confidence among higher income groups trended upward on a six-month moving average basis.