Consumers feel even worse about the US economy thanks to inflation

The final index reading of 50 in the monthly consumer surveys was just below the preliminary reading of 50.2 released two weeks ago. The final June index – a 14.4% drop since May – marks the lowest level since the university began collecting consumer sentiment data in November 1952.

“Consumers, regardless of income, age, education, geographic region, political affiliation, stock ownership and ownership status, all saw steep declines,” said Joanna Hsu, director of consumer surveys, in a press release. “About 79% of consumers expected bad times in the coming year for trading conditions, the highest since 2009.”

Inflation remains the top consumer concern, she noted, adding that 47% of consumers blamed the sharp rise in prices for eroding their standard of living. That’s 1 percentage point below the all-time high reached during the Great Recession, according to the report.

“As higher prices become harder to avoid, consumers may feel they have no choice but to adjust their spending habits, whether by replacing goods or foregoing shopping,” Hsu said. “The speed and intensity at which these adjustments occur will be critical to the trajectory of the economy.”

Households expect prices to rise further this year and expect them to stay above the Fed’s 2% target for the next five years, according to survey data. Consumers expect inflation to reach a rate of 5.3% over the next year and 3.1% over the next five years.

Expectations for the year ahead are little changed from the preliminary reading and those of the past few months, Hsu said.

Still, consumers are feeling slightly more optimistic about long-term inflation as well as the continued strength of the labor market, according to the survey.

More than half of consumers surveyed said they expected revenue growth over the next year, according to the survey.

Preliminary record Michigan survey data released two weeks ago sparked a stock market plunge and likely factored in the Fed’s decision last week to hike rates 75 basis points from 50 previously telegraphed base points.

At the press conference following the central bank’s June policy-making meeting, Federal Reserve Chairman Jerome Powell said early June readings from the University of Michigan — including expectations of higher inflation for the next few years – were “eye-catching”.

The Fed’s heightened sensitivity to the consumer survey gives added weight to consumer sentiment and long-term inflation forecasts and the external factors that could influence them – including political ads, Goldman Sachs analysts said this week.

“High inflation is expected to feature prominently in political ads ahead of midterm elections in the coming months,” the analysts wrote in a research note released Thursday.

This will likely keep inflation top of mind and potentially trigger higher inflation expectations, they noted. If expectations rise, the Fed may be forced to “react forcefully to further, even moderate, increases in long-term inflation expectations,” the note said.

“As a result, we consider the coming onslaught of inflation-focused policy ads to increase the risk that the Fed could continue to tighten aggressively even if economic activity slows sharply,” the note said.


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