Inflation Concerns Impact Consumer Sentiment

Consumer sentiment continues to face significant challenges as inflation expectations have now reached 3.3% for both the short- and long-term outlooks. This comes even though December's core inflation has shown signs of moderation, recording a year-over-year increase of 3.2%, which is below the anticipated rate of 3.3%.

According to Cathie Wood, the CEO of Ark Invest, the current economic climate is causing consumers to feel anxious about inflation. She noted, “The consumer is worried about both short-term inflation expectations over the next year and long-term inflation expectations over the next 3 to 5 years, with both popping to 3.3%,” indicating the effects on consumer sentiment.

The recent increase in inflation, which stands at 3.3%, highlights emerging concerns for consumers. Although there has been a slight rebound in consumer sentiment due to prevailing economic conditions, worries surrounding inflation are tempering these optimistic expectations. Wood discussed the current macroeconomic conditions in her recent update, which was published on January 15, 2025.

Looking at the economic data, the headline Consumer Price Index (CPI) experienced a year-over-year rise of 2.9% in December, up from 2.7% in November. This marks the third consecutive monthly increase and signifies the highest level since July. The surge in energy prices has significantly influenced these adjustments, with the energy index climbing by 2.6%, accounting for more than 40% of the price increases recorded in December.

In this context, Peter Schiff, Chief Economist at Europac, has expressed concerns about the overarching economic pressures. He pointed out that “the CRB jumped another 1.6%, reaching a new 17-year high, up 21% in the past four months, while oil spiked almost 4%, closing at $80.41.” This information highlights the volatility and rising costs in the commodities market.

The CRB Commodity Index, currently positioned at 370.7, previously achieved an all-time high of 470.17 in July 2008. This index serves as an essential indicator, tracking the price movements across 19 different commodities, such as aluminum, cocoa, coffee, and copper, thus providing a comprehensive overview of commodity sectors.

Despite Wall Street celebrating what was perceived as a “benign” inflation report, the CRB index surged by another 1.6%, reaching its new 17-year high. This increase signifies a 21% rise within just four months, while oil prices also soared to almost 4%, indicating alarming price trends that contradict Wall Street’s beliefs about low inflation rates.

Mixed responses have been observed in financial markets, particularly with Treasury yields experiencing significant declines. Mohamed El-Erian, the Chief Economic Advisor at Allianz, commented on the situation, noting, “a significant, across-the-board move down in yields today in the advanced world,” attributing this to better-than-expected inflation data coming from the U.S.

However, former Treasury Secretary Larry Summers has raised alarms about fiscal stability, pointing out that “the 5 year 5 year US Treasury yield has hit 5 percent even as the real yield for the same horizon is above 2.6 percent,” which raises concerns surrounding future budget deficits.

Despite ongoing concerns, the SPDR S&P 500 ETF Trust (SPY) experienced a rally, gaining 1.82%, while the Invesco QQQ Trust (QQQ) rose by 2.30%. The Financial Select Sector SPDR Fund (XLF) led sector gains with a 2.55% increase as major banks reported impressive fourth-quarter earnings, reflecting some positive movement in the stock markets amidst inflation concerns.

inflation, sentiment, economy