The mood of the American consumer soured again heading into the back half of the year. The University of Michigan's preliminary October reading of its closely watched Index of Consumer Sentiment slid to 46.3, down from 48.1 in September and below the roughly 47.5 reading economists had expected, according to the Surveys of Consumers released Friday.

It marks the index's lowest point since May, and the sub-gauge measuring how households view their present-day finances fared even worse: the Current Economic Conditions index tumbled to 44.7 from 50.9, one of the weakest readings on record for that measure.

Prices, Not Paychecks, Are the Problem

Inflation expectations also crept higher. Consumers now expect prices to rise 4.7% over the next year, up from 4.6% in September, while long-run inflation expectations ticked up to 3.5% from 3.4%, according to Investing.com and Finimize.

Survey director Joanne Hsu said the pain is concentrated among households with the least cushion. Sentiment dropped steeply for lower-income consumers and those holding fewer stocks, she said, since both groups have the smallest buffer against higher prices. Year-ahead inflation expectations are now well above the 3.4% reading recorded in February, before the U.S.-Israeli conflict with Iran rattled oil markets, and five-year expectations are running outside the 2.8%-to-3.2% range households reported through 2024.

Lower-income consumers and those with smaller stock holdings "have fewer resources to absorb price increases," Hsu said of the steep drop in their outlook.

The timing lines up with a broader inflation scare. Gasoline and diesel prices have climbed as the Middle East conflict disrupts energy supplies, and the Federal Reserve responded in September with its first rate increase since July 2023, lifting its benchmark rate a quarter point to a range of 3.75% to 4.00% — a reversal from the cuts it delivered through late 2025.

Spending Hasn't Gotten the Memo

Oddly, the gloom hasn't shown up at the register yet. Costco reported that September comparable sales in the U.S., excluding gasoline, rose at an annualized 8% pace, and Walmart posted a 5.9% jump in quarterly revenue to $187.9 billion. Weekly jobless claims, meanwhile, fell to 197,000 — still near the lowest levels in roughly half a century, a sign layoffs remain scarce even as confidence erodes.

That gap between what households say and what they do has analysts divided. Some read the slump as a lagging reaction to pump prices and sticky grocery bills; others see an early warning that consumers are stretching themselves on credit while telling surveyors they're worried. The five-year inflation figure is the one bond investors are watching most closely, since a durable rise in long-run expectations can push the Fed toward keeping rates higher for longer.

The University of Michigan will publish its final October reading, which can revise the preliminary numbers, on October 23 — just as retailers start gauging early holiday demand and days after a fresh slate of Wall Street earnings reports.

For now, the disconnect leaves economists parsing two different pictures of the same economy: wallets that keep opening, and a national mood that keeps darkening.