US consumer sentiment sinks to 2014 low as fuel costs and rate hike bite ahead of midterms

American consumers are growing markedly more pessimistic about the state of the economy, with a closely watched monthly measure of sentiment sliding to its weakest reading since 2014, according to figures published on Tuesday by The Conference Board. The report landed at a politically charged moment, arriving just over a month before voters across the United States go to the polls in the congressional midterm elections that will decide which party controls the House and Senate in Washington.

The Conference Board, a business research group that has tracked household sentiment for decades, said its Consumer Confidence Index "deteriorated notably in September, following two prior months of softening." The result extends a stretch of gradual decline rather than a single shock, suggesting that the deterioration in mood has been building for a full quarter as households adjust to a harder economic environment.

Consumers themselves pointed to one thing above all else: the rising cost of goods and services. Higher retail prices, insurance, utilities and other everyday expenses have eaten into household budgets at a time when the cost of borrowing has also moved sharply higher, and Americans surveyed by the research group were clear that price levels — not job prospects or interest rates in isolation — were the chief reason their confidence fell.

Fuel costs appear to have been the single most acute source of that pressure. The average price of a gallon (3.78 litres) of petrol climbed 37 cents over the past month, according to the American Automobile Association, which tracks pump prices daily. The national average stood at $4.45 on Tuesday, up from $4.08 a month earlier. Because gasoline is one of the most visible and immediate outgoings for most households, a jump of that size in a single month tends to reinforce the sense that day-to-day life is getting more expensive.

Dana Peterson, chief economist at The Conference Board, said the data reflected the sharp rise in energy markets during the month. Oil and gas prices, in his view, "rose to new heights, reflecting September's surge in fuel costs." Notably, the survey also captured a slight easing in anxiety about war and conflict: fewer respondents volunteered comments about geopolitical tensions than in the previous reading, though the level of such concerns remained elevated rather than returning to pre-crisis norms.

The report arrived a day ahead of a key inflation gauge that policymakers watch closely. The Federal Reserve relies on the personal consumption expenditures (PCE) price index, the central bank's preferred measure of inflation, which was up 3.7 percent in June compared with a year earlier. That reading, cited in the article, was the most recent figure available at the time of writing and left inflation running well above the central bank's target — a backdrop that complicates any hopes of rate relief for borrowers.

Compounding the squeeze, the Fed raised interest rates for the first time in three years earlier in September, a move that has increased the cost of credit cards, car loans and bank loans. For a consumer base already absorbing higher prices at the register, the practical effect is a double hit: the same household is paying more for what it buys and more for the money used to buy it. Sentiment indicators tend to react to that combination quickly, and respondents to the September survey appear to have registered the pressure keenly.

The central bank is scheduled to make its next rate decision at its October 27-28 meeting, which means the September confidence data will be in the hands of officials — and of politicians — well before Election Day. The timing leaves both the Fed and elected officials with little room to change the underlying trajectory quickly, and it puts the squeeze on household finances squarely at the centre of the midterm argument.

Politically, the reading is significant because the decline was not confined to any one group. Consumer confidence fell among all political affiliations, according to The Conference Board, making this the second-to-last major confidence release before the midterms. That breadth matters for campaign strategists: an economic mood that has weakened across the electorate is difficult for any single party to claim credit for, and difficult for either side to pin on the other.

Partisan perceptions of who is best equipped to manage the economy have also tilted away from the party holding the White House. In a recent Marist poll, 42 percent of US consumers said the Democratic Party would do a better job handling the economy, compared with 34 percent who said the same of the Republicans — a modest but persistent gap, published shortly after the confidence report and suggesting the pain at the pump is not translating into an advantage for incumbents.

Financial markets, meanwhile, took the news largely in stride. US indexes closed only slightly lower on the trading day: the tech-heavy Nasdaq slipped 0.08 percent, the Dow Jones Industrial Average fell 0.2 percent and the S&P 500 was down 0.1 percent. The muted reaction suggests that the deterioration in sentiment, while politically unwelcome, was not read by investors as a sudden threat to growth or to corporate earnings.

Analysts and economists caution, however, that sentiment and spending do not always move together. Households frequently report feeling worse about their finances while continuing to buy, drawing down savings, or shifting spending toward lower-priced goods. For that reason, observers are likely to watch actual retail sales data and the Fed's own consumption figures for evidence that the September slump in confidence has begun to translate into slower household spending.

For the Fed, the message is more delicate still. A central bank that has just resumed tightening must weigh the drag of higher borrowing costs on an already gloomy consumer against the risk of encouraging inflation that has shown little sign of cooling. If the upcoming PCE data confirms that price pressures remain sticky, the October meeting will be hard going — and the political consequences of that decision, arriving just before the midterms, could be as significant as the economic ones.

For voters, the September reading offers a snapshot of an economy that is functioning but tightening: petrol at its highest in months, borrowing costs up, prices still elevated, and optimism at a level not seen in more than a decade. Whether that translates into a shift in voting behaviour will likely depend on what the October inflation figures show and on what the candidates say in the weeks remaining before the election.