Fear of inflation sharply dampened consumer sentiment in early May

Early May results from the University of Michigan Survey of Consumers show that overall consumer sentiment declined sharply in early May (see top of chart first). Composite consumer sentiment fell to 59.1 in early May, down from 65.2 in April, with a loss of 6.1 points or 9.4 percent. The index is now down 41.9 points from its February 2020 high.

Both components post the index fall. The current-economic-index fell to 69.6 from 63.4 in April (see the middle of the first chart). This leaves the index with a 5.8-point or 8.4 percent decline for the month and a 51.2-point drop from February 2020 and keeps the index at its lowest level since March 2009.

The second sub-index – Consumer Expectations, one of the main indicators of AIER – lost 6.2 points, or 9.9 percent, for the month, to 56.3 (see chart below). The index has been below 35.8 points since February 2020.

All three indicators are near or below the lows seen in the last four of the last six recessions (see first chart).

According to the report, “These declines were broad – in line with current economic conditions as well as consumer expectations, and visible across income, age, education, geography and political affiliation – continuing the general downward trend in last year’s sentiment.” The report added, “Consumer appraisals about their current financial situation are at their lowest level since 2013, compared to a year ago, with 36% of consumers blaming their negative appraisals for inflation.” Furthermore, “since the question began to appear in the monthly survey in 1978, the condition of buying durable goods has reached the lowest level, again primarily due to the high price.”

One-year inflation expectations remained unchanged at 5.4 percent in early May, the highest level since November 1981. One-year expectations have risen several times over 3.5 percent since 2005 only to fall behind (see second chart). Five-year inflation expectations were unchanged at 3.0 percent in early May. That result ranges from 2.2 percent to 3.5 percent (see second chart) in the 25-year range.

According to the report, “the median expected year-on-year inflation rate was 5.4%, slightly changed in the last three months and increased to 4.6% in May 2021. The average was significantly higher at 7.4%, reflecting a significant change in prices And throughout the service and in the types of household expenses

The report added, “At the same time, long-term inflation expectations have been well anchored, with a mid-range of 3.0%, which has stabilized in the range of 2.9 to 3.1% seen in the last 10 months.”

The weak trend in consumer sentiment reflects a combination of events with inflation led by the pack. Constantly high price increases affect consumer and business decision making and distort economic activity. Overall, economic risks remain high due to the effects of inflation, the beginning of the Fed tightening cycle, the Russian aggression in Ukraine, and renewed lockdowns in China. Ramping up negative political advertising during midterm elections could also affect consumer sentiment in the coming months. The overall economic outlook remains highly uncertain.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 for over 25 years researching economic and financial markets on Wall Street. Bob previously headed Brown Brothers Harriman’s Global Equity Strategy, where he developed an equity investment strategy that combines top-down macro analysis with bottom-up fundamentals.

Prior to BBH, Bob was a senior equity strategist at State Street Global Markets, a senior economic strategist at Prudential Equity Group, and a senior economist at Citicorp Investment Services and a financial markets analyst. Bob holds an MA in Economics from Fordham University and a BS in Business from Lehigh University.

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