Consumer Confidence Slides as Gas Prices Outrun Grocery Relief

A four-month low that kept falling

In late September, U.S. consumer sentiment hit a four-month low. Two weeks later it fell again. The University of Michigan's final September index came in at 48.1, down from 51.7 in August, as fuel costs and new trade fights weighed on how households see the economy.1113 The September number was 7% below August and 15% below January.13 ABC News called it the second-lowest final reading in the survey's 74-year history. Only May's 44.8, recorded a few months after the Iran war began, was lower.18

The preliminary October reading, released October 9, dropped to 46.3, a five-month low. That was below the roughly 47.5 to 47.6 economists had expected.310 The index is now only 1.5 points above its all-time low.10 The current-conditions gauge fell 12.2% to 44.7. Some coverage described that as a record low for the component.18 The expectations gauge actually rose slightly, to 47.3.2 In other words, people feel worse about the present than about the future. That points to a problem with prices today more than fear of what is coming.

The Conference Board's index confirmed the trend. It fell 6.7 points in September to its weakest level since 2014. Coverage put the reading at 81.8 or 81.9, depending on the outlet.1419 That is lower than during the COVID-19 pandemic.19 "Consumers are more disgruntled and squeezed in this economy than they felt during the 2020 pandemic," said Navy Federal Credit Union chief economist Heather Long.14

What the survey actually blames

The headline about grocery prices is the part that needs the most care. Some of the September coverage listed grocery bills alongside gas as a main reason confidence fell. One report said grocery prices kept rising sharply into early September because of tariffs, energy costs and supply problems.11 The official price data tell a calmer story.

Food-at-home prices were flat in August and fell 0.1% in September, according to the Bureau of Labor Statistics. Grocery inflation was just 1.8% over the past year.21 Annual grocery inflation slowed from 2.2% in August.23 Milk fell 2% for the month and beef fell 1%. Eggs are now 20.6% cheaper than a year ago as supply recovers from avian flu.2225 In September the USDA lowered its full-year forecast for grocery inflation to 2.4%.30

Gasoline is a different story. Its index jumped 9.1% in September and drove more than half of the month's 0.6% rise in overall prices. Headline inflation reached 3.7%, up from 3.4% in August.21 Gas prices are up 34.2% over the year.22 A gallon averaged $4.49, about 50% more than when the war with Iran began in late February.18 That rise is tied to the effective shutdown of the Strait of Hormuz.13

The survey's own director points to energy too. Joanne Hsu said the short-term outlook for business conditions plunged on worries that high fuel prices and renewed trade disputes would spread through the economy.11 The share of respondents who mentioned gasoline without being asked rose to 31% in September. Hsu added that consumers broadly expect gas prices to keep rising in both the short and long run.13 The Conference Board's chief economist, Dana Peterson, said write-in mentions of prices, especially oil and gas, "rose to new heights."14

Our reading: this confidence slump is mainly about energy, not food. Grocery anxiety is real, but it reflects prices that are still high rather than prices rising fast.

Why grocery bills still hurt

That doesn't make the grocery complaints wrong. Slower inflation does not mean lower prices. Grocery prices are still 1.8% above a year ago even after September's dip.23 Ground beef averaged about $6.79 a pound, 7.4% higher than a year earlier. Rice and coffee were each up about 7% from a year ago. Iceberg lettuce jumped 11.2% in one month.24 Shoppers notice these items every week, so they shape how people feel more than an average does.

The bigger risk is still ahead. Diesel fuels the trucks and farm equipment that move food to stores. It averaged $6.44 a gallon in late September after a record $6.53.19 The Food Industry Association (FMI), the main grocery trade group, praised September's grocery numbers. It also warned that record diesel costs tied to the Iran conflict are starting to move through the grocery supply chain and could push prices up in the coming months.28 The USDA still expects beef prices to rise 9.4% this year.30 When consumers report worrying about groceries, they may be pricing in that next round of increases before it shows up in the data.

Rising expectations point the same way. Michigan respondents now expect 4.7% inflation over the next year and 3.5% over the long run. Both are the highest readings since May and well above the 3.4% expected in February, before the conflict began.1 Conference Board respondents expect 5.1% inflation a year from now.14

The spending puzzle

Consumers say they feel terrible, but they keep spending. Retail sales jumped 1.2% in August after falling in July.16 Consumer spending rose 0.9% that month while personal income grew just 0.2%. After taxes and inflation, disposable income did not grow at all. The saving rate was 4.1%.19 "Consumer sentiment is low," Philadelphia Fed President Anna Paulson said, "but the spending data tell a different story."16

Coverage offers two explanations, and both seem to hold. The first is buying ahead. In September, Hsu said buying conditions for big-ticket items had improved partly because people wanted to purchase before prices rose further.16 By October that had reversed: buying conditions for durable goods plummeted under high prices and borrowing costs.1 That shift suggests the urge to buy early may be fading.

The second explanation is a K-shaped economy, where wealthier households do well and others fall behind. One wealth manager said households with investment gains keep spending, while others pay more for basics and cut back on extras.19 Michigan's October data support this. Sentiment fell steeply among lower-income consumers and those with small stock holdings, the groups least able to absorb higher prices.1 One analysis noted that the October reading came out while the S&P 500 traded near record highs.7 A related Michigan report found that 54% of consumers planned to buy less of items with big price increases, and about 16% expected to stop buying them altogether.8

This split matters for retailers. Spending held up by the top of the income ladder can mask real pain at the bottom, especially as the holiday season approaches.

The Fed and the midterms

The Federal Reserve raised its benchmark rate on September 16 to a range of 3.75% to 4%, its first increase in three years.16 Higher borrowing costs have since lifted rates on credit cards and mortgages.18 The confidence data have shifted rate expectations. After the Conference Board release and a speech by New York Fed President John Williams, traders cut the odds of another hike on October 28 from 71% to 47%.14 The hotter September inflation report revived those bets.24

The politics matter too. Sentiment has fallen among both Republicans and Democrats. Republican confidence is down 20% since January and Democratic confidence is down 13%.13 White House economic adviser Kevin Hassett called the energy-driven spike temporary and pointed to cheaper groceries.25 Meanwhile, workers' pay rose 3% over the year while prices rose 3.7%.25 With the midterm elections weeks away, one political scientist argued that bad economic conditions reliably lead voters to punish the president's party.19

The final October Michigan reading comes out October 23.4 Prediction-market traders were split on whether it will land just above or just below 46.5 Either way, the main finding is unlikely to change. The slump is driven mostly by gasoline, made worse by borrowing costs, and felt most by lower-income households. Grocery inflation has cooled in the official numbers, but people still expect food prices to rise.