Survey: Consumer Sentiment Drops Sharply Due to Inflation, Other Factors

According to the University of Michigan’s surveys of consumers, consumer sentiment fell 13.4 percent in August from July, recording the least favorable economic prospects in more than a decade.
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The University of Michigan’s Consumer Sentiment Index dropped 13.4 percent over fear of inflation and more. // Stock Photo

According to the University of Michigan’s surveys of consumers, consumer sentiment fell 13.4 percent in August from July, recording the least favorable economic prospects in more than a decade.

Since 1978, the Sentiment Index has only recorded a larger loss in six other monthly surveys. The losses were widespread across demographic groups, regions, and for all aspects of the economy.

“The August free-fall in confidence was in response to mounting issues, including rising inflation, small wage gains, and slower declines in unemployment,” says Richard Curtin, a U-M economist and director of the surveys. “The falloff also reflected an emotional response to people’s dashed hopes that the pandemic would soon end, and lives could get back to normal.”

One in five households in August cited the negative impact of inflation on their budgets, up from one in 20 to begin 2021. Responses that the recent runup in inflation lowered living standards was an issue voiced by 30 percent of those 65 and older, 24 percent of these had a high school education level or less, and 23 percent who are in households in the bottom third of income.

The economy’s overall recovery increased pessimism, including the national unemployment rate. Only 38 percent of consumers anticipated a decline in the jobless rate, down from 52 percent last month. This reflects an anticipated overall slowdown , as only 31 percent thought the economy would improve, down from 50 percent in July.

The Consumer Sentiment Index fell to 70.3 this month, a steep drop-off from 81.2 percent in July, and below the low of 71.8 during the economic shutdown during April 2020. The Expectations Index component posted by far the largest decline, falling to 65.1 in August from 79.0 in July, while the Current Conditions Index posted a more modest decline, falling to 78.5 in August from June’s 84.5.

“This is not the first time emotion has partly determined economic behavior. Twenty years ago, the terrorist attacks on 9/11 led to an emotional retrenchment in spending,” says Cutin. “Although economic expectations improved by year-end, the emotional impact on spending patterns lasted much longer. The same type of persistent impact is now likely to reoccur.”

The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95 percent level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.

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