Survey: Easing Inflation Offset by Rising Borrowing Costs

Consumer sentiment lifted for the second straight month in January, rising 9 percent above December but remaining about 3 percent below a year ago, according to the latest Surveys of Consumers from the University of Michigan in Ann Arbor.
389
Young tired stressed overworked businesswoman freelancer teacher student exhausted after hard work, suffering from migraine headache at office. Deadline, fired worker, debt, problems concept
Even as consumer sentiment continues to rise for the second straight month, the number is still below the mark set last year. // Stock Photo

Consumer sentiment lifted for the second straight month in January, rising 9 percent above December but remaining about 3 percent below a year ago, according to the latest Surveys of Consumers from the University of Michigan in Ann Arbor.

Easing inflation and strong incomes provided welcome support to the personal finances of American consumers and buoyed their views of current economic conditions, says U-M economist Joanne Hsu, director of the surveys.

“Slowing inflation provides some much-needed upward momentum for consumer sentiment. However, global factors like the end of China’s ‘zero-COVID’ policies may put additional upward pressure on inflation,” says Hsu.

“Furthermore, the debt ceiling debate looms ahead and could reverse the improvement in sentiment seen over the last several months; past debt ceiling crises in 2011 and 2013 prompted steep declines in consumer confidence.”

However, the short-run economic outlook fell modestly from December, with two-thirds of consumers expecting an economic downturn in the year ahead. In contrast, the long-run outlook rose 10 percent to its strongest level in nine months, though it remains 15 percent below its historical average.

The recent easing of inflation boosted consumer attitudes, and consumer assessments of their personal finances surged 19 percent to its highest reading in eight months. A still-sizable 36 percent of consumers reported that their living standards are being eroded by inflation, the lowest share since April 2022.

Consumers voiced fewer concerns over gas and food prices in January, and a declining share of consumers blamed high prices for poor buying conditions for durable goods, cars, as well as homes. However, concerns over inflation remain substantially higher than a year and a half ago prior to the onset of elevated inflation.

While slowing inflation has been welcomed by consumers, sentiment has been partially offset by the negative impact of rising interest rates. Consumers continued to note the growth of borrowing costs; for the third straight month, more than 30 percent of consumers spontaneously mentioned high interest rates weighing down buying conditions for durables, vehicles, for homes.

The share of consumers expecting further rate hikes this year fell from the all-time peak of 88 percent in April 2022 but remained high at 70 percent, indicating that these concerns will remain salient, says Hsu. While the slowdown in inflation increases the purchasing power held by consumers, the continued rise in borrowing costs weighs down consumers’ willingness to spend.

Consumers’ views of housing markets have also continued to worsen in the wake of rising interest rates. About 31 percent of consumers expected home prices to fall in the year ahead, the largest share since this question first appeared on the January 2007 survey.

The Consumer Sentiment Index rose to 64.9 in the January 2023 survey, up from 59.7 in December and below last January’s 67.2. The Current Index rose to 68.4, up from 59.4 in December and below last January’s 72. The Expectations Index rose to 62.7, up from 59.9 in December and below last January’s 64.1.

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.