Consumer Sentiment Sinks as Hope Crashes and Inflation Expectations Hit Four-Decade High
Everyone has jobs and no one is happy because prices are rising so sharply.U.S.
. consumer sentiment fell in March to the lowest since 2011 despite the level of jobless claims declining to the lowest level in decades and unemployment likely sinking to multi-decade lows.
The University of Michigan’s sentiment index dropped to 59.4, from 62.8 in February, data released Friday showed. This was lower than the mid-month read of 59.7. Economists had projected no further deterioration from the mid-month reading. “Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4 percent, the highest since November 1981,” said Richard Curtin, the surveys chief economist, in a statement.
The sentiment index has taken a severe beating in the first year of Biden’s presidency, falling 30 percent compared with March of 2020.
The index of current conditions is off by 27.7 percent while the expectations index is down 31.9 percent. Both expectations and current conditions indexes fell again in March.
The reading of current conditions was off by 1.5 percent compared with February.
The expectations index fell by a jaw-dropping 8.6 percent. Inflation is taking a heavy toll on consumers, leading many to conclude that any income gains will be overwhelmed by rising prices. “Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions,” Curtin said. “When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years: from March 1979 to April 1981, and from May to October 2008.” Thirty-two percent of consumers expect their overall financial position to worsen in the year ahead, the highest ever recorded in the history of the surveys started in the mid-1940s. Half of all households expect declines in inflation-adjusted incomes in the year ahead due to the combination of rapidly rising prices and less positive income expectations. Consumers remain optimistic about the strong job market, reflecting the rapid decline in unemployment, near-record number of job openings, and extremely low levels of layoffs.
The trouble is that this situation is likely to help keep inflation high and possibly drive it even higher. “Strong job growth will continue to put upward pressures on wages, resulting in higher income and stronger job prospects. This strength will then act to expand consumer demand and ultimately lead to another cycle of price and wage increases.
These factors represent the necessary (but not sufficient) conditions for the development of inflationary psychology as a self-fulfilling prophecy,” Curtin said.
The Biden administration and the Federal Reserve face a challenge in overcoming this dynamic because of a low level of consumer confidence in current economic policies. “Prevention of inflationary psychology is much less costly before it becomes ingrained in the economic behavior of consumers and firms. Confidence that economic policies will resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16 percent who rated them favorably,” Curtin said.
The newly emerged covid-variant and, to a greater extent, the Ukraine war will make stemming inflationary-psychology even more difficult, according to Curtin.
Read the full article at the original website
References:
