By Lucia Mutikani
WASHINGTON, March 27 (Reuters) – U.S. consumer sentiment fell more than expected in March, touching a three-month low, as war in the Middle East stoked inflation worries and cast a shadow over the economic outlook.
The decline, reported by the University of Michigan’s Surveys of Consumers on Friday, occurred across political party affiliation and age groups, with large decreases among middle- and higher-income consumers as well as those owning stocks.
The month-long U.S.-Israeli war with Iran has sent global oil prices surging more than 50%. Retail gasoline prices have jumped $1 to an average of $3.98 per gallon, data from motorist advocacy group AAA showed, while the S&P 500 index has dropped about 6.7%.
Though the correlation between consumer sentiment and spending is weak, rising gasoline prices and falling share values, combined with a stagnant labor market, could undercut consumption and hamper economic growth. Higher-income households have led consumer spending, underpinned by robust wealth levels.
“Sentiment hit a record low in mid-2022 when inflation was at its highest level in decades, but the economy held up with solid GDP growth and an historically strong labor market,” said Gus Faucher, chief economist at PNC Financial.
“But if the conflict drags on, gasoline prices move even higher in the summer driving season, and stocks continue to falter, consumers could throw in the towel and start to pull back on their spending.”
The University of Michigan said its Consumer Sentiment Index dropped to a final reading of 53.3 this month, the lowest reading since December, from 55.5 earlier. Economists polled by Reuters had forecast the index would ease to 54.0.
It was at 56.6 in February and is not too far from a record low touched in June 2022. The survey’s short-run economic outlook gauge plunged 14%, while a measure of year-ahead expected personal finances sank 10%. Declines in long-run expectations were more subdued, the survey showed.
“These patterns suggest that, at this time, consumers may not expect recent negative developments to persist far into the future,” said Joanne Hsu, the director of the University of Michigan’s Surveys of Consumers. “These views are subject to change, however, if the Iran conflict becomes protracted or if higher energy prices pass through to overall inflation.”
WILL GASOLINE PRICES OFFSET TAX CUTS?
There are worries that gasoline prices, should they continue to rise, could cut into the fiscal boost from tax cuts ushered in by the One Big Beautiful Bill Act. Economists at JPMorgan estimated that could happen if the national average price rises close to $5 per gallon or more. Prices at the pump in California and Washington state have already topped $5 per gallon.
“As things stand now, the increase in gasoline prices to date is unlikely to fully offset the magnitude of lower taxes,” they wrote in a note. “Of course, even if higher gas prices don’t fully offset the OBBBA, they would still reduce real spending power compared to what was expected before the Mideast conflict began. Higher gas prices are also mostly felt more evenly across the income distribution.”
Stocks on Wall Street extended their decline, with the S&P 500 and Nasdaq Composite indexes dropping to more than six-month lows. The dollar was steady against a basket of currencies. U.S. Treasury yields were mixed.
The survey’s measure of consumers’ expectations for inflation over the next year jumped to 3.8% this month from 3.4% earlier in March and in February. Consumers’ expectations for inflation over the next five years slipped to 3.2% from 3.3% last month.
The Federal Reserve left its benchmark overnight interest rate in the 3.50%-3.75% range this month. In updated projections released alongside the decision, U.S. central bank policymakers anticipated higher inflation and only a single reduction in borrowing costs this year.
“The evidence would appear to be for now that the inflation impact of high gas prices is expected to be temporary, but it would appear that the year-ahead expectation is set to jump above 4% in the preliminary April report,” said John Ryding, chief economic advisor at Brean Capital. “From a Fed perspective, the majority of the (policy-setting) committee might interpret this to mean that rates should be held steady.”
(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci)
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