American consumer confidence took a sharp hit this month, with the University of Michigan's closely watched sentiment index tumbling to a preliminary reading of 51.0 in August — well below the roughly 54.5 that economists had forecast and down from July's final reading of 55.2, according to data reported by InvestingLive.

The drop snaps two straight months of improvement in the survey and marks one of the sharper monthly declines of the year. Both major subcomponents fell: the Current Economic Conditions Index slid to 51.8 from 54.9, while the Index of Consumer Expectations dropped more steeply, to 50.6 from 54.0.

Inflation Fears Creep Back Up

Households' near-term inflation expectations also ticked higher, with the one-year outlook rising to 4.3% from 4.2% in July. Longer-run inflation expectations, covering the next five to ten years, held steady at 3.3%. The survey found sentiment weakening across income levels, age groups and political affiliations, with the sharpest declines concentrated among Republicans, older consumers, lower-income households and those without a four-year college degree.

Economists have long debated how closely the Michigan survey tracks actual consumer behavior, and some market commentators have grown skeptical of its predictive value in recent years given a history of sharp revisions. Still, the index remains one of the most closely watched monthly gauges of household psychology, and a reading this far below expectations is likely to draw attention from Federal Reserve officials weighing their next move on interest rates.

Eyes on Jackson Hole

The soft reading arrives roughly two weeks before the Fed's Jackson Hole Economic Symposium, running August 27-29, where Fed Chair Kevin Warsh is expected to speak. Markets will be parsing any signal on the central bank's thinking heading into its September meeting, after the Fed held its benchmark rate steady at 3.50%-3.75% in July on a divided 9-3 vote.