US consumer sentiment jumps to 54.4 as inflation fears persist at 4.2%

The University of Michigan's sentiment index rose to 54.4 in July, a five-month high, yet consumers still expect prices to rise 4.2% annually — a level that keeps pressure on the Federal Reserve to maintain a restrictive policy stance.

"The improvement in sentiment is encouraging, but inflation expectations remain stubbornly elevated, which is a concern for the Fed's outlook," said Joanne Hsu, director of the University of Michigan's Surveys of Consumers.

The preliminary July reading topped all estimates in a Bloomberg survey of economists and marked a 4.9-point jump from June's 49.5. The one-year inflation expectation of 4.2% has held in a narrow range between 4.1% and 4.3% since March, well above the 2.5% to 3% range that prevailed through most of 2024. The last time the reading exceeded 4% for a sustained period was in mid-2023, when the Fed was still raising rates.

The conflicting signals landed in a market already on edge. The S&P 500 fell 0.6% to 7,490.05 by mid-morning Friday, while the Nasdaq Composite dropped 1.3% to 25,558.15 as the PHLX Semiconductor Index extended its decline into bear-market territory, down more than 20% from its late-June record. The Dow Jones Industrial Average was little changed at 52,557.53. The CBOE Volatility Index rose to 18.03, the highest in more than a week, as a global rout in chip stocks and escalating US-Iran tensions drove a broad risk-off move.

Netflix shares slid 9% after the streaming giant's third-quarter revenue forecast disappointed analysts, adding to the downbeat tone. Chinese AI startup Moonshot also unveiled Kimi K3, a 2.8 trillion-parameter open-weight model it called the world's largest, stoking competition fears for US AI leaders.

The macro data elsewhere offered a mixed picture. Housing starts surged 19% in June to an annualized 1.427 million units, the strongest in three months and well above the 1.31 million consensus, while building permits fell 3% to 1.367 million, missing estimates. Import prices rose 0.3% on the month, pushing the annual rate to 7.1% — the strongest since August 2022 — while export prices posted their first monthly decline in more than a year, falling 0.6%. Industrial production edged up 0.1% in June and grew at a 4% annualized pace in the second quarter, though capacity utilization remained 3.3 percentage points below its long-run average at 76.1%.

For the Fed, the persistence of elevated inflation expectations at 4.2% poses a challenge. The last time the one-year outlook held above 4% for multiple months was in the first half of 2023, when the central bank delivered three additional quarter-point rate hikes before pausing. With the fed funds rate currently at 5.25% to 5.5% and markets pricing a roughly 50% probability of a cut by September, according to OIS pricing, the data may reinforce the case for patience. Higher gasoline prices tied to renewed US-Iran hostilities — the US struck bridges and an airport in Iran overnight, and Tehran responded by hitting a power and desalination plant in Kuwait — risk keeping inflation expectations elevated in the months ahead, even as the broader economy shows resilience.

This article is for informational purposes only and does not constitute investment advice.