U.S. consumer sentiment falls sharply as inflation pressures weigh on consumers
U.S. consumer sentiment dropped to 61.7 in February’s preliminary reading, reflecting a decline from the prior month’s index value of 67.2 in just a few weeks and marking the lowest level for the index in over a decade.
The decline encompassed both key components to the index, indicating that consumers view current economic conditions as deteriorating even as they have also grown increasingly gloomy in their future outlook.
Inflation remains the greatest concern for consumers — understandably so, considering upward pressure on prices for a wide range of goods and services has shown little evidence of abating. It’s worth noting that the survey was completed before the January report on consumer prices was released yesterday. The fact that consumer prices surpassed expectations to the upside in January as the index reached a four-decade high will undoubtedly weigh further on sentiment in the near term.
Broadly speaking, inflation is widely viewed as disproportionally hurting lower-income households and those on fixed incomes. Notably, the deterioration in confidence was concentrated in higher-income households who are also feeling the effects of higher prices. Recent volatility in the stock market likely played a role, as wealthier consumers likely saw their portfolios decline since the beginning of the year.
Rising prices have negated otherwise considerable gains in hourly wages over the last year, creating a growing headwind to future growth in consumer spending. The buildup in savings and reduced debt service costs provide some relief but will only help to fuel continued spending growth to a point.
As a result, consumers appear to be turning their focus away from the optimism of returning to a pre-pandemic lifestyle and toward an economy where they’re facing higher prices and bracing for higher interest rates in anticipation of the Fed’s imminent tightening.
The bottom line: Despite solid growth expectations and employment conditions that favor workers, surging inflation is weighing heavily on the collective consumer mood. Although most economists and policymakers still expect the consumer price index to peak before midyear, skeptics would point to last year’s optimistic forecasts as reason to temper current expectations. Even if the pace of price increases does peak in the near term, the economy is a long way from the 2% inflation that policymakers want and consumers were accustomed to for much of the past decade. That’s an adjustment for consumers and one that’s a tough pill to swallow.
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