US inflation expectations soar as consumer sentiment plummets: UMich survey.
Americans are bracing themselves for worsening inflation and have growing concerns about their personal finances, painting a bleak picture of the national economy.
“Inflation expectations for the next year have risen from 3.2 percent to 4.2 percent, the highest level since May 2023,” according to a survey report by the University of Michigan. Alongside this surge in inflation, consumer sentiment dropped by 6 percent in October, following two months of little change. Joanne Hsu, the chief economist and director of the surveys, stated, “While consumers acknowledge that inflation has slowed down from its peak last summer, they cannot ignore the fact that their budgets are still stretched and their purchasing power has decreased.”
Concerns over the prices of essential goods like food and gas are particularly prominent among consumers. However, despite these worries, the strength in incomes is currently supporting overall spending.
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Approximately 47 percent of consumers reported that high prices were negatively impacting their living standards, which is 8 percentage points higher than in September.
When discussing inflation, consumers specifically mentioned the prices of gas and groceries. However, mentions of high prices for larger purchases like durables and vehicles remained relatively stable this month.
Lower-income consumers experienced little change in their personal finances, while middle and higher-income consumers have seen declines since August, partly due to recent stock market weakness.
Expectations for consumer’s personal finances in the next year dropped by 8 percent compared to last month, while expectations for business conditions in the next year plummeted by 16 percent.
“The continuous stream of negative headlines, such as the war in the Middle East, the resolved leadership crisis in the House of Representatives, and daily developments in Trump’s legal troubles, among others, has had its own negative impact on consumer sentiment,” said Ms. Hsu.
Consumer expectations for long-run inflation increased from 2.8 percent to 3.0 percent this month, remaining within the narrow range of 2.9-3.1 percent for 25 of the last 27 months. This is significantly higher than the 2.2-2.6 percent range seen in the two years before the COVID-19 pandemic.
Inflation and Interest Rates
Consumer concerns about inflation arise as the U.S. Federal Reserve attempts to combat it by raising interest rates. However, this action has led to rising prices and elevated rates, putting pressure on household budgets and business finances.
Since March 2022, the central bank has increased its benchmark interest rate by 500 basis points to a range of 5.25 percent to 5.5 percent, the highest level in 22 years.
During the latest Fed meeting, the central bank decided not to raise interest rates. Federal Reserve Chair Jerome Powell suggested that there may be no rate hike in the upcoming meeting scheduled between October 31 and November 1.
However, the Fed’s “Summary of Economic Projections” from September left room for one more potential rate hike.
Speaking at a business conference earlier this month, Federal Reserve Gov. Michelle Bowman stated that interest rates may need to be raised further to address the inflation issue.
“Inflation continues to be too high, and I believe it will be necessary for the Committee to raise rates further and maintain them at a restrictive level for some time in order to bring inflation back to our 2 percent goal in a timely manner,” she said.
Ms. Bowman warned that there is a “continued risk that high energy prices could reverse some of the progress we have seen in controlling inflation in recent months.”
Mr. Powell acknowledged that inflation remains high and that economic growth may need to slow down to reach the Fed’s target rate of 2 percent. In September, annual inflation stood at 3.7 percent.
However, the economy grew by 4.9 percent in the third quarter of 2023, accelerating from the 2.1 percent growth in the previous quarter. This growth puts pressure on the Fed to raise rates.
Struggling Under Inflation
The high rate of inflation has made life difficult for Americans. A Gallup survey conducted in May revealed that 61 percent of U.S. citizens were facing financial hardship in their households due to elevated prices, the highest percentage since 2021 when Gallup began tracking the data.
“A relatively consistent 15 percent of U.S. adults state that the hardship caused by inflation is ‘severe’ and affects their ability to maintain their current standard of living,” according to a Gallup survey report from May 18. This percentage has remained relatively stable and has not varied significantly since the initial reading.
Lower-income Americans have been more severely impacted by inflation compared to those in higher income brackets.
An April Gallup poll identified inflation as the top concern for Americans, with 35 percent citing it as the biggest issue. Additionally, 11 percent mentioned the cost of owning or renting a home, and 9 percent saw ”too much debt” as a major problem.
In a recent interview with CNBC, former Walmart CEO Bill Simon stated that consumers had enjoyed an “incredible 10, 12-year run” when “markets were buoyant, interest rates were low, [and] money was available.”
However, factors like inflation and high interest rates are now causing consumers to hesitate. Simon explained, “That sort of accumulation wears on the consumer and makes them cautious… For the first time in a long time, there’s a reason for the consumer to pause.”
What factors are contributing to the decline in personal finances for middle and higher-income consumers?
Thers, are contributing to this bleak sentiment,” said Hsu. “Consumers are feeling overwhelmed and uncertain about the future, which is impacting their expectations for both personal finances and business conditions.”
The survey also revealed that concerns over inflation are not limited to just consumers. Small businesses are also feeling the effects of rising prices. In fact, 62 percent of small businesses reported that inflation has negatively impacted their operations. This can be attributed to the increased costs of raw materials, transportation, and labor.
Furthermore, the survey highlighted the widening gap between different income groups. While lower-income consumers experienced little change in their personal finances, middle and higher-income consumers have seen declines since August. This can be attributed to recent stock market weakness and the overall impact of inflation on their purchasing power.
In addition to inflation concerns, consumers are also worried about the prices of essential goods like food and gas. The rising cost of these items is squeezing their budgets and decreasing their purchasing power. Approximately 47 percent of consumers reported that high prices were negatively impacting their living standards, an increase of 8 percentage points compared to September.
Despite these concerns, the strength in incomes is currently supporting overall spending. This suggests that consumers are continuing to spend, even as they face higher prices. However, there is a growing sense of unease and uncertainty among Americans about the long-term effects of inflation on their personal finances.
It is worth noting that inflation expectations for the next year have risen to 4.2 percent, the highest level since May 2023. This indicates that Americans anticipate further increases in prices, which will continue to impact their financial well-being.
In conclusion, Americans are bracing themselves for worsening inflation and have growing concerns about their personal finances. The survey by the University of Michigan paints a bleak picture of the national economy, with consumer sentiment dropping and expectations for both personal finances and business conditions plummeting. It is clear that inflation is taking a toll on the wallets of consumers and the operations of small businesses. As the prices of essential goods continue to rise, Americans face the challenge of stretching their budgets and maintaining their standard of living.
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