Consumer sentiment rises in June as PCE inflation cools to 0.4%

Consumer sentiment improved from recent record lows in June as gasoline prices moderated, the University of Michigan's monthly survey showed, while a separate report on personal consumption expenditures inflation came in below forecasts.

"The Fed will be unhappy about inflation when they meet next in July, but likely will still hold rates steady," Bill Adams, chief economist at Fifth Third Commercial Bank, said in a note.

The core PCE price index — the Federal Reserve's preferred inflation gauge — rose 0.4% month-on-month in May, below the 0.5% expected by economists in a Wall Street Journal survey. The data pushed back against the building narrative toward Fed rate hikes in recent weeks, Deutsche Bank analysts said. The 10-year Treasury yield fell 1.8 basis points to 4.376%, while the dollar index slipped 0.1% to 101.362 after reaching a 13-month high of 101.800 on Wednesday.

The improvement in consumer sentiment, combined with easing price pressures, suggests households are beginning to adjust to the post-tariff pricing environment. Lower gasoline prices have been the primary driver, reducing a key source of financial strain for lower- and middle-income households. If sustained, the trend could support consumer spending — which accounts for roughly two-thirds of U.S. economic output — through the second half of the year.

PCE inflation cools, supporting rate-cut expectations

The PCE data marked the second consecutive month of below-consensus readings, Deutsche Bank analysts said, adding that there is growing speculation the Fed might not need to raise rates at all this year. Markets had priced in a roughly 30% probability of a rate hike at the July Federal Open Market Committee meeting before the data, according to CME FedWatch. That probability has since declined.

The University of Michigan survey also showed an improvement in consumers' inflation expectations, according to the report. One-year inflation expectations edged lower, aligning with the broader trend of easing price pressures seen in the PCE data. Eurozone households reported a similar cooling in price expectations, with the European Central Bank's survey showing one-year inflation expectations falling to 3.5% in May from 4.0% in April.

Equity markets responded positively to the twin data releases. The S&P 500 traded near the flatline Friday, while the Dow Jones Industrial Average edged up 0.1%. Consumer discretionary and retail stocks led gains on expectations that lower fuel costs and easing inflation would boost household spending power. Healthcare stocks were also a standout, with Eli Lilly rising nearly 6% and Johnson & Johnson gaining more than 3%.

The improvement in sentiment comes after a period of significant economic disruption. The U.S. war with Iran and the subsequent disruption to oil flows through the Strait of Hormuz had pushed gasoline prices sharply higher earlier this year, dragging consumer confidence to record lows. President Trump's 60-day deal to reopen the strait, reached earlier this month, has since sent oil prices falling back toward prewar levels, with Brent crude falling 2% to $74.03 a barrel Friday.

The last time consumer sentiment reached similar lows was during the early months of the Covid-19 pandemic in 2020, when lockdowns brought economic activity to a near-standstill. The current recovery, by contrast, is being driven by a specific and identifiable factor — the resolution of the Hormuz crisis and the subsequent decline in energy costs — rather than broad-based fiscal stimulus.

The next major test for the consumer outlook will be the June nonfarm payrolls report, due July 3, which will show whether the labor market remains resilient enough to sustain the improvement in sentiment. For now, the combination of moderating gasoline prices and cooling inflation has provided the most favorable macro backdrop for U.S. consumers since before the tariff-driven price spikes earlier this year.

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