The Conference Board’s measure of consumer confidence fell in August to 113.8, well below forecasts for 123.0 — the lowest index reading since February. It also represented a sharp decline from 129.1 in July, which had been the highpoint since the onset of the COVID-19 pandemic in the United States in early 2020.
The rising risk created by the emergence of the Delta variant across much of the country and globally has at least temporarily dampened consumer enthusiasm that had surged on the arrival and distribution of COVID-19 vaccines earlier this year.
The growing question is how the spread of a much more contagious variant will impact travel, work, and education, both in terms of government restrictions and consumer behavior, and the economy. Those developments come at a point that the economy was already slowing as the lift provided by fiscal and monetary stimulus started to fade.
It’s not just the ongoing health threat from the pandemic that’s giving consumers reason for pause. Rising prices for a broad range of goods and services have not been lost on consumers and is likely to make some think twice about discretionary purchases. Consumer prices surged by nearly 5.4% in July from a year earlier, in line with June’s increase, matching the largest 12-month gain since August 2008.
To this point, it appears that consumers largely continue to buy into the Fed’s argument that inflation pressures should subside as economic conditions normalize, the continued return of workers alleviate labor shortages, and supply chain disruptions eventually resolve. It’s possible that process could take longer than expected though, and inflation could remain above the Fed’s 2% target for some time. While not excessive in a historical context, even 2% inflation would represent a change after a decade in which deflation was at times a greater concern.
Despite those concerns, upward pressure on prices alone shouldn’t deter continued improvement in consumer spending in the months ahead, although the pace of spending growth may ease. That slowdown in spending could be exacerbated by the impact of the Delta variant, but the economy still appears well positioned to push forward in spite of those dual headwinds.
The bottom line? Consumers are increasingly aware of the near-term risks to the economic recovery created by rising prices and the COVID-19 resurgence. The recent moderation in the collective consumer mood notwithstanding, confidence is still relatively high and at a level consistent with solid consumer spending.
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