The increasing concerns about the U.S. inflation levels continue to dampen U.S. consumer sentiments as the metric surprisingly slid to a five-month low level in early July. Notably, the University of Michigan’s preliminary consumer sentiment index declined to 80.8 in July from 85.5 last month. The metric also lagged economists’ median forecast of 86.5, per a Bloomberg poll.

The measure of current economic conditions declined to 84.5 in July (the lowest since August). Meanwhile, a gauge of consumer expectations fell to a five-month low of 78.4 in July from June’s 83.5.

Moving on, one-year inflation expectation rose 4.8%, the highest since August 2008. Meanwhile, the survey's five-to-10-year inflation outlook increased to 2.9% from 2.8%, according to a Bloomberg article.

In this regard, Surveys of Consumers chief economist Richard Curtin said that “Inflation has put added pressure on living standards, especially on lower and middle income households, and caused postponement of large discretionary purchases, especially among upper income households,” (per a Bloomberg article).

Notably, consumers seem to be disturbed about the rising prices of homes, vehicles and household durables. In fact, the buying attitudes for vehicles and homes contracted to their lowest level since 1982, per the same Bloomberg report.

Current U.S. Economic Scenario

Investors seem worried about the sustainability of the U.S. economic recovery from the pandemic-led slump and the delta variant threat. Further, after an impressive first half of the ongoing year, market analysts are anxious about Wall Street’s performance for the rest of 2021, according to a CNBC article.

Moreover, annual inflation rate in the United States accelerated to 5.4% year over year in June 2021 from 5% in May, hitting a fresh high since August 2008, and well above forecasts of 4.9%. The latest uptick in inflation was the largest 12-month increase.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9% sequentially in June on a seasonally adjusted basis after rising 0.6% in May, the U.S. Bureau of Labor Statistics reported. This marked the largest one-month change since June 2008 when the index had risen 1.0%.

Meanwhile, the world’s largest economy is strongly combatting the coronavirus outbreak. Rapid distribution of coronavirus vaccines by multiple developers, the Fed’s continued support with easy monetary policies, fiscal stimulus support and reopening of non-essential business are strengthening hopes of rapid recovery from the coronavirus-led slump.

Going on, per the latest FOMC minutes, the central bank will wait patiently to attain the “substantial further progress” benchmark before tightening the policy, as stated in a CNBC article. Moreover, the summary from the meeting maintained the same stance on inflation as Federal Reserve chairman Jerome Powell had discussed.

According to a CNBC article, Powell has been bullish on the economic recovery achieved so far from the pandemic-led slump. He also maintained that high inflation levels were temporary and will return to 2% over the long term, per the same article.

Wall Street also cheered President Joe Biden’s announcement of the White House striking an infrastructure deal with a bipartisan group of senators. According to the White House, the infrastructure deal will include $579 billion in new spending.

Strengthening optimism, coronavirus vaccines have been found effective against the Delta variant. These include vaccines by Pfizer (PFE) /BioNTech and AstraZeneca (AZN). Two doses of their COVID-19 vaccine have been found to be about 88% effective against the Delta variant, per a CNN report. Moreover, Moderna’s (MRNA) COVID-19 vaccine has been successful in producing neutralizing titers against all variants tested, including the rapidly spreading delta variant (B.1.617.12).

ETFs That Might Suffer

The fall in consumer sentiment is likely to hurt the consumer discretionary sector, which attracts a major portion of consumer spending amid rising inflation levels.Below we have highlighted the four most popular funds that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund (XLY Quick QuoteXLY - Free Report)

This is the largest and most popular product in the consumer discretionary space, with AUM of $19.92 billion. It tracks the Consumer Discretionary Select Sector Index. The fund charges 12 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: Play Revenue Growth With 5 ETFs As Earnings Hopes Too Upbeat).

Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report)

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index. VCR charges investors 10 bps in annual fees. The product has managed $6.55 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook.

First Trust Consumer Discretionary AlphaDEX Fund (FXD Quick QuoteFXD - Free Report)

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index. FXD has AUM of $1.91 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF (FDIS Quick QuoteFDIS - Free Report)

This fund tracks the MSCI USA IMI Consumer Discretionary Index. The product has amassed $1.63 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Bet on These 5 Top-Ranked ETFs to Boost Portfolio Returns).