Supply chain slowdowns caused by labor shortages, a runup in energy costs, and higher prices for certain goods left consumer sentiment virtually unchanged in the past three months, at levels comparable to the pandemic low point in April 2020, according to the latest University of Michigan Surveys of Consumers.
Richard Curtin, director of the surveys and an economist at U-M, says the positive impact of higher income expectations and the receding coronavirus has been offset by higher rates of inflation and falling confidence in government economic policies.
Consumers not only anticipated the highest year-ahead inflation rate since 2008 in the October survey, but also expressed greater uncertainty about the year-ahead inflation rate than any time in nearly 40 years. In fact, declining living standards due to rising inflation were mentioned by 1 in every 5 households, concentrated among older and poorer households, Curtin says.
“The patterns of consumers’ reactions to surging inflation represent the preconditions that can promote an escalating inflation rate in the year ahead,” Curtin says. “Consumers’ recognition of rising prices is near universal, so too is their desire to reestablish spending for a more traditional holiday season.
“People understand that inflation has been due to upheavals in supply lines and labor markets. The lower resistance to higher prices, due in part to incentive swollen savings, is matched by less resistance among sellers to hiking prices to cover higher materials and labor costs. Combined with greater fiscal stimulus, these reactions will accelerate future rates of inflation.”
Inflation drives widespread declines in living standards
Expected increases in nominal incomes rose to 2.6 percent in October, up from 1.5 percent last month. The last time a higher income gain was expected across all households was in 2007.
The year-ahead rate of inflation was expected to be 4.8 percent, the highest level since 2008, Curtin says. As a result, when asked about expected inflation-adjusted income gains during the year ahead, twice as many households anticipated real income declines as increases. Across age, income, and education subgroups, only those under age 45 expected real income gains.
According to a report from the U.S. Labor Department on Friday, it appears wage increases will benefit low-wage earners as employers seek to expand or maintain their respective workforces.
Price hikes dim spending outlook
Although consumers anticipated that the economy would likely continue to improve, the pace of gains were expected to slow. When asked about what news they had heard about the economy, twice as many consumers reported unfavorable development than favorable, whereas six months ago they reported positive and negative news equally.
When asked whether the gains would usher in good economic times, the majority judged it would still constitute bad times for the year ahead (56 percent), and over the longer term, growth would be interrupted by renewed downturns (57 percent). As a result, unemployment was expected to fall by 37 percent, down from 52 percent three months ago.
In turn, chip shortages within the automotive industry have caused price hikes among new and used vehicles. While the supply of chips will eventually increase to meet demand, it could be well into next year when the situation balances.
Consumer Sentiment Index
The Consumer Sentiment Index posted a small decline in October, retreating to 71.7 from last month’s 72.8, and falling to just below the pandemic low of 71.8. The Expectations Index fell to 67.9 from last month’s 68.1 and was well below last year’s 79.2. The Current Conditions Index posted a larger loss in October, falling to 77.7 from last month’s 80.1 and last year’s 85.9. The decline reflects the negative impact of higher inflation on household budgets.
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.