US consumer sentiment saw an increase in early June, marking the first rise in four months. The University of Michigan's preliminary sentiment index climbed to 48.9 in June, up from a record low of 44.8 in May. This figure surpassed most economists' expectations but nonetheless represents the second-lowest reading since the 1970s. The improvement is largely attributed to a moderation in gasoline prices, which provided some relief to American households grappling with significant inflation.
Lower-income households experienced a particularly strong improvement in sentiment, as gasoline expenses constitute a larger portion of their budgets. Joanne Hsu, director of the University of Michigan's Surveys of Consumers, noted that the gain was broad-based across various demographics, including age, education, and political affiliation. Despite this monthly uptick, overall consumer views of the economy remain weak, with sentiment still 13% below January 2026 levels and 19% lower than a year prior, indicating persistent concerns about inflation and its impact on household finances.
Gasoline prices played a crucial role in this sentiment shift, with the national average retail price dropping to $4.11 per gallon this week from $4.56 on May 21, which was a four-year high. This decline occurred despite the ongoing US-led war against Iran, now in its fourth month, and oil prices remaining below $100 a barrel amidst a fragile ceasefire. However, the conflict continues to pose a risk to the economic outlook and has contributed to enduring inflation concerns.
Inflation expectations also saw a slight moderation. The survey's measure of consumer expectations for inflation over the next year dipped to 4.6% in June from 4.8% in May. Similarly, expectations for inflation over the next five years decreased to 3.4% from 3.9% last month. Despite these modest declines, year-ahead inflation expectations remain above the 3.4% level recorded in February, before the start of the Iran conflict. The persistent high cost of living is a significant factor contributing to unhappiness with President Trump's handling of the economy and is weighing on his approval rating.
High inflation has dampened hopes for an interest rate cut from the Federal Reserve this year, with financial markets now pricing in the possibility of monetary policy tightening instead. Economists believe that the bar for a rate hike remains high unless widespread energy-related price increases emerge. The U.S. central bank is expected to maintain its benchmark overnight interest rate within the 3.50%-3.75% range in the near future, while potentially abandoning its easing bias.
