US consumer sentiment slumps on debt ceiling impasse

US consumer sentiment slumped to a six-month low in May on worries that political haggling over raising the federal government’s borrowing cap could trigger a recession. The University of Michigan’s survey also showed consumers’ long-term inflation expectations jumping this month to their highest reading since 2011, bad news for the Fed after it signaled last week that it could pause the US central bank’s fastest monetary policy tightening cycle since the 1980s.

The survey’s preliminary reading on the overall index of consumer sentiment came in at 57.7 this month, the lowest reading since last November and down from 63.5 in April. The non-partisan Congressional Budget Office warned that the nation faced a “significant risk” of defaulting on payment obligations within the first two weeks of June without a debt ceiling increase.

Stocks on Wall Street were trading lower, the dollar rose against a basket of currencies, and US Treasury prices fell. Some economists cautioned against reading too much into the plunge in sentiment and jump in long-term inflation expectations, arguing that there was no strong correlation with consumer spending.

The US central bank has raised its benchmark overnight interest rate by 500 basis points since March 2022, but news on the inflation front has been encouraging. Import prices increased in April for the first time since December 2022, but imported inflation pressures remained subdued. Prices in the 12 months through April fell 4.8%, matching the decline in March. Imported fuel prices increased 4.5% in April, driven by a 5.7% jump in petroleum prices.

Imports from China fell 0.3%, extending their decline this year. Imports from Japan, Canada, Mexico and the European Union cost more. This month’s import price report offers evidence of cooling price dynamics working through the economy, and analysts’ expectation for the Fed to hold rates high until year-end will intensify the import price deflationary cycle in the months ahead.