August 17, 2018 / 3:00 PM / a month ago

U.S. consumer sentiment hits 11-month low, inflation in focus

WASHINGTON (Reuters) - U.S. consumer sentiment fell to an 11-month low in early August, with households expressing concerns about the rising cost of living, potentially signaling a slowdown in consumer spending.

FILE PHOTO: A woman shops with her daughter at a Walmart Supercenter in Rogers, Arkansas, U.S., June 6, 2013. REUTERS/Rick Wilking/File Photo

The University of Michigan on Friday said its consumer sentiment index fell to a reading of 95.3 early this month, the weakest since September 2017, from 97.9 in July. The survey’s current conditions sub-index of consumer expectations dropped to 107.8 from July’s reading of 114.4.

It said the decline in sentiment was concentrated among households in the bottom third of the income distribution, adding that consumers’ views on prices for big-ticket household goods were the least favorable in nearly 10 years.

Inflation has been rising in recent months, driven in part by strong domestic demand and a labor market that is viewed as being near or at full employment.

Economists said some of the consumers’ unease with pricey goods could be linked to the Trump administration’s protectionist trade policy, which has led to an escalation of a trade war between the United States and China as well as tit-for-tat tariffs with the European Union, Canada and Mexico.

The import duties are seen driving up prices.

“The decline (in sentiment) suggests at face value that the recent escalation of trade tensions may be worrying some consumers,” said Andrew Hunter, a U.S. economist at Capital Economics. “But the details suggest that the bigger factor has been the recent rise in inflation.”

The consumer price index increased 2.9 percent year-on-year in July, matching June’s gain, which was the largest rise since February 2012. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 1.9 percent in June.

FILE PHOTO: Shoppers ride escalators at the Beverly Center mall in Los Angeles, California, U.S., November 8, 2013. REUTERS/David McNew/File Photo

The core PCE price index hit the U.S. central bank’s 2 percent inflation target in March for the first time since December 2011.

DRAG ON SPENDING

According to the University of Michigan, consumers’ perceptions of conditions for purchasing large long-lasting household goods were the least favorable in nearly four years. Their views on motor vehicle prices were the worst since 1984.

“Consumers are paying attention and they aren’t happy that prices are rising, particularly on higher ticket items like cars and houses,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. “At the margins, that’s likely to drag on spending.”

Consumers’ inflation expectations over the next five years rose 2.5 percent early this month from 2.4 percent in July.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity increased at a 4.0 percent annualized rate in the second quarter. That helped to lift gross domestic product growth to a 4.1 percent rate, the fastest in nearly four years and almost double the 2.2 percent pace in the first quarter.

The University of Michigan survey also showed consumers’ perceptions about home buying conditions were the least favorable in 10 years and their views on house prices were the worst since 2006. This is bad news for the housing market, which has underperformed the strong economy.

The housing market is being stymied by an acute shortage of properties available for sale, which has driven up home prices. House prices have risen more than 6 percent on an annual basis, far outpacing wage growth, which has been stuck below 3 percent.

“Today’s report showed that consumers perceive themselves to be worse off financially currently as a result of affordability issues related to big ticket consumer items and housing,” said Blerina Uruci, an economist at Barclays in Washington.

Reporting By Lucia Mutikani; Editing by Dan Grebler and Susan Thomas

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