Eyes on the Economy: Optimism, Sentiment, Inflation

Small Business Optimism Slips as Uncertainty, Cost Pressures Rise

Small business optimism weakened in September as uncertainty, labor shortages and inflation weighed on owners. The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 0.8 points to 97.9, slightly below its long-term average of 98.0. The subindex for uncertainty increased to 90, well above its historical average of 68.

Labor quality or availability remained the leading concern, cited by 26% of business owners, while 20% identified inflation as their biggest problem, up four percentage points from August. Expectations for improving business conditions declined for a second consecutive month, and only 7% considered it a good time to expand, down five points. Owners also reported weaker business health: 48% described their businesses as good, down nine points. Borrowing costs increased, with average short-term loan rates rising to 8.2%. Meanwhile, 32% reported unfilled job openings, underscoring persistent hiring difficulties despite a more cautious business outlook. 

Consumer Sentiment Edged Down in October

Consumer sentiment edged lower in October as high prices and borrowing costs continued to strain household finances. The University of Michigan’s preliminary Consumer Sentiment Index fell to 46.3 from 48.1 in September, down 3.7% month over month and 13.6% from a year earlier. The subindex for current economic conditions dropped 12.2%, while expectations for the future improved slightly.

Buying conditions for durable goods deteriorated sharply, even as consumers’ expectations for personal finances and business conditions in the year ahead edged higher. Sentiment fell particularly steeply among lower-income households and consumers with smaller stock portfolios, who have fewer resources to absorb rising prices. Across political affiliations, consumers viewed the economy’s trajectory as weaker than at the beginning of the year. Inflation concerns also intensified. Year-ahead inflation expectations increased to 4.7% from 4.6%, while long-run expectations rose to 3.5% from 3.4%. Both measures increased for a second consecutive month, reaching their highest levels since May.

Consumer and Producer Inflation Accelerate in September

Inflation accelerated in September, with consumer and producer prices both exceeding expectations. Annual Consumer Price Index (CPI) inflation rose to 3.7% from 3.4% in August, above the anticipated 3.6%, largely reflecting higher energy prices. Gasoline prices increased 34.2%, while fuel oil surged 74.2%. Shelter inflation also picked up, reaching 3.2%, although food inflation eased to 2.5%. Annual core CPI, which excludes food and energy, climbed to 2.6% from 2.4%, exceeding forecasts of 2.5%. 

On a monthly basis, the CPI increased 0.6%, its largest gain in five months, following August’s 0.4% rise. A 9.1% jump in gasoline prices accounted for more than half of the overall increase. Prices also rose for recreation, used vehicles, education, airline fares, medical care and apparel. Food prices were unchanged, while communication prices declined.  

Meanwhile, Producer Price Index (PPI) rose 6.3% from a year ago, the most since December 2022. Similarly, core producer inflation reached 5%, its highest since January 2023, compared with an upwardly revised 4.8% in August. Monthly core producer prices increased 0.7%, the strongest gain in five months. Both CPI and PPI data suggest that inflation is reaccelerating.  

Inflation Accelerates and Runs Above the Target Rate

Sources: Trading Economics.