Consumer Sentiment Stuck Near Decade Low While Inflation Fears Rise
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Consumer Sentiment Stuck Near Decade Low While Inflation Fears Rise

Consumer sentiment remains mired in the depths it sunk to in August.
Consumer Sentiment Stuck Near Decade Low While Inflation Fears Rise

The University of Michigan’s index of consumer sentiment inched up to a reading of 71 from 70.3 at the end of August. Analysts had forecast a rise to 72. “The steep August falloff in consumer sentiment ended in early September, but the small gain still meant that consumers expected the least favorable economic prospects in more than a decade,” said Richard Curtin, the survey’s chief economy.

The gauge of current conditions dropped in the first weeks of September, declining to 77.1 from 78.5.

The outlook, however, brightened somewhat, with the expectations index lifting two points to 67.1. Consumers are significantly less positive than they were a year ago, when the economy was still reeling from the pandemic and lockdowns. In September of 2020, the index stood at 80.4, 11.7 percent higher than today. Curtin said two of the components of consumer sentiment declined: buying attitudes for household durables fell to a low reached only once before in 1980, and long term economic prospects fell to a decade low. Curtin explained: The decline in assessments of buying conditions for homes, vehicles, and household durables left all three near all-time record lows (see the chart), with the declines due to spontaneous references to high prices. Some observers anticipated that the early August plunge in confidence would quickly disappear since it was driven by emotions. Emotions have long been known to speed responses, the so-called fight or flight response, which was the adaptive function they performed in early August. Many other sources of economic data have since shifted in the same direction, and point toward slower growth in consumer expenditures and purchases of housing to the end of 2021. Expectations for inflation over the next year also worsened, with expected prices rising 4.7 percent from 4.6 percent two weeks ago. “Consumers have initially reacted by viewing the rise in inflation as transitory, believing that prices will stabilize or could even fall in the future. As a result, postponing purchases is seen as a viable strategy. This implies a slowdown of spending in the months ahead and a more robust rebound later in 2022,” Curtin said. If consumers become convinced that inflation is here to stay or bound to rise even futher, however, that could change. But such changes in attitude take time to fully develop. “The resulting rise in inflationary psychology will lessen resistance to rising prices and stiffen demands for increased wage gains,” Curtin said.

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