U-M: Consumer Sentiment Hits Decade Low, Inflation Top Concern

According to the University of Michigan Surveys of Consumers, consumer sentiment was at 4.8 percent in January, sinking to its lowest level since November 2011.
Grocery Expenses. Concerned Woman Sitting In Kitchen, Looking At Food Shopping Bill
The U-M Consumer Sentiment Survey is at a decade low, with inflation as a top concern. // Stock Photo

According to the University of Michigan Surveys of Consumers, consumer sentiment was at 4.8 percent in January, sinking to its lowest level since November 2011.

Delta and Omicron variants of COVID-19 were the largest factors, but other factors — some of which were triggered by COVID-19 — have become independent forces that play a role in shaping sentiment, says Richard Curtin, U-M economist and director of the surveys.

The Consumer Sentiment Index fell to 67.2 in the January 2022 survey, down from 70.6 in December and well below last January’s 79.0. The Expectations Index fell to 64.1 in January, down slightly from last month’s 68.3 and well below last year’s 74.0. The Current Conditions Index fell to 72.0, down from last month’s 74.2, and well below last year’s 86.7.

“The Fed is about to raise interest rates to tame inflation. Their actions will slow job and wage growth and trim gains in stocks and home values,” says Curtin. “By slowly hiking rates, one of the Fed’s goals is to prevent any noticeable impact on all other aspects of the economy except inflation.

“Such a soft landing has a reasonable chance of success if accompanied by a positive economic environment, not one where the majority of consumers view the economy as already in a weakened state.”

Supply chains and essential workers sparked the initial increases in prices and wages. Household spending has been supported by an extraordinary pace of rising home and stock prices that is likely to turn negative in the year ahead.

Overall confidence in government economic policies is at its lowest level since 2014, and the major geopolitical risks may add to the pandemic active confrontations with other countries. The primary concern is rising inflation and falling real incomes, which may cause consumers to misinterpret the Fed’s policy moves to slow the economy as part of the problem instead of the solution.

Among all consumers, 75 percent reported inflation rather than unemployment as the more serious problem facing the nation. These heightened concerns were reflected in half-century record numbers of consumers who negatively judge current market prices for homes, vehicles, and durables. While these concerns were higher than in the late 1970s, when inflation was about twice as high, those high rates were not personally experienced by most of today’s consumers.

Half of all households reported that the economy had worsened, and just one-third think it will improve during the year ahead. When asked about the longer-run prospects for the national economy, uninterrupted growth was expected by just 33 percent in January 2022, while 58 percent anticipated a renewed recession. Both outlooks are weaker from the last December and January of 2021.

“The danger is that consumers may overreact to these tiny nudges, especially given the uncertainties about the coronavirus and other heightened geopolitical risks,” says Curtin. “Clear policy communication is insufficient if it does not also advance consumers’ understanding of the economic tradeoffs involved and their plans to actively alleviate any undue harm.”

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.