Consumer Sentiment Falls to 46.3 as Inflation Worries Hit Bonds

WASHINGTON — U.S. consumer sentiment slipped in October and long-run inflation expectations ticked higher, a combination that gives the bond market another reason to question how quickly price pressure will ease. The University of Michigan’s preliminary index fell to 46.3 from 48.1 in September, below the 47.5 economists expected.

Key takeaways

• The sentiment index fell to 46.3 from 48.1, missing the 47.5 forecast.
• One-year-ahead inflation expectations rose to 4.7 percent from 4.6 percent, slightly below the 4.8 percent forecast.
• Long-run expectations rose to 3.5 percent from 3.4 percent.
• The survey director said sentiment fell steeply among lower-income households and those with smaller stock portfolios.

What the survey showed

According to the report, the decline was concentrated among households with fewer resources to absorb price increases. UMich’s Joanne Hsu said lower-income consumers and those with small equity holdings were the most affected, as concerns about living costs mounted. The report tied the price pressure to a war that has run for more than six months and squeezed energy supply flows out of the Middle East.

Expectations are the part of the report that bond traders watch most closely. Inflation expectations remain well above the 3.4 percent level seen in February, before the U.S.-Israeli conflict with Iran began, the report noted. The long-run figure of 3.5 percent is higher than the 2.8 to 3.2 percent range of 2024. Consumer prices were rising at an annualized 3.4 percent in August, the report said.

Why Treasury investors care

Long-run inflation expectations feed directly into the inflation compensation embedded in Treasury yields and into the Federal Reserve’s thinking. The Fed raised rates in September for the first time since 2023, and its minutes, released Wednesday, say participants judged short-term expectations as elevated even though medium- and longer-term market and survey measures remained consistent with 2 percent. A survey measure moving up by a tenth of a point does not overturn that assessment, but it adds to the argument that the risks to inflation are skewed to the upside.

The report also complicates a simple story of a weakening consumer. Spending has held up, the report noted, with retail sales rebounding sharply in August. Resilient spending alongside rising expectations is a mix that gives the Fed less reason to ease off.

Misses and near-misses against forecasts

The details diverge from the headline index. Sentiment missed expectations by 1.2 points, but one-year inflation expectations of 4.7 percent were a notch below the 4.8 percent economists projected, so the survey was not uniformly worse than feared. The long-run reading is what sets it apart, because it moved up while the near-term figure barely changed. Households that expect prices to stay high for five to ten years are, in effect, describing the kind of inflation persistence the Fed has said it worries about.

The Treasury market backdrop

The survey landed after a week of elevated long-dated yields. Treasury Department data show the 30-year closing at 5.67 percent and the 10-year at 5.28 percent on Wednesday, October 7. Higher yields feed back into household finances through mortgage rates and borrowing costs, which is part of what the survey’s lower-income respondents describe when they cite living costs. The report also noted that affordability has become a central issue ahead of the midterm elections.

What to watch

The September consumer price report arrives on October 14. Treasury yields will react to whether actual prices confirm what households say they expect. Affordability has also become a political issue ahead of the midterm elections, which adds pressure on policymakers as inflation expectations stay above their pre-war levels.