An Odd Disconnect: Consumer Confidence At 12 Year High As Inflation Expectations Tumble To All Time Lows

There is an odd divergence in the latest UMichigan consumer sentiment print: on one hand, the December index of Consumer Sentiment rose from 93.8 in November to 98.2, up from the preliminary 98.0 print, even as long-term inflation expectation, those in the 5-10 year bucket, dropped from 2.50% to 2.30%,a new all time low print.

Which is odd, because the very reason for the surge in confidence is due to the recent spike in the market, driven higher by expectations or rising inflation, something which apparently has not filtered through to orderinary US consumers, who instead are hoping to have their Dow Jones 20,000 hat, while basking in the glow of dropping prices and a "deflationary mindeset."

(Click on image to enlarge)

It wasn't just long-run inflation expectations - the 1-year inflation outlook similarly slipped from 2.3% to 2.3%, the lowest print in 6 years, suggesting that Trump's reflationary policies will fail. 

(Click on image to enlarge)

According to the report, while the surge in confidence following Trump's surprise election ended by mid December, it nonetheless led to the highest level of the Sentiment Index since January 2004. Compared with the rapid gains made in late November and early December, the Sentiment Index was barely higher than at mid month and barely higher than the January 2015 peak - in both cases, just two-tenths of a point - but that small difference was enough to establish a twelve year peak.

An all-time record number of consumers (18%) spontaneously mentioned the expected favorable impact of Trump's policies on the economy. This was twice as high as the prior peak (9%) recorded in 1981 when Reagan took office. To be sure, nearly as many consumers referred unfavorably to anticipated changes in economic policies, but those references were less than half as frequent as the peak level recorded just three years ago (16% vs. 37%). Consumers anticipated that a stronger economy would create more jobs, although expected wage gains were quite meager.

Smaller income gains were offset by record low inflation expectations. Needless to say, the overall gain in confidence was based on anticipated policy changes, with specific details as yet unknown. Such favorable expectations could help jump-start growth before the actual enactment of policy changes, and form higher performance standards that will be used to judge the Trump presidency.

And confirming that the UMich report is nothing more than a politically biased attempt to push and pull "confidence", moments after the report, UMich Chief Economist Richard Curtin pulled away the curtain so to speak, on what is coming:

• MICHIGAN'S CURTIN: SENTIMENT LIKELY TO FALL IN COMING MONTHS

For those wondering, this is a statement Curtin has never made before, suggesting that as many speculate, the economy - and stocks - are primed for a drop following Trump's inauguration.