In the University of Michigan Consumer Sentiment Index, that index value dropped to half a century low of 50.8 in April. That’s a significant decline from March’s reading of 57. This unexpected drop shocked analysts, who had expected a much less dramatic reading of 54.5. American consumers are more connected and more concerned about inflation and economic stability than ever before. This rising worry is a bad sign at any time, but especially as our economy enters perilous waters.
The Current Conditions Index saw a big red plummet. Retreating from 63.8 to 56.5, it contributed further to the overall sentiment index’s steep … Continue reading →At the same time, Consumers Expectations Index plummeted to 47.2 from 52.6 reflecting a waning optimism for the foreseeable future. Those are troubling figures that indicate consumers are more cautious about the state of the economy, especially when it comes to job security and inflation.
The report uncovers a deeply troubling statistic. Consumers are expecting an increase in unemployment over the next year at the most pessimistic level since 2009. Americans are more concerned than ever about the stability of their jobs. Even worse, at the same time, inflation expectations are increasing, likely further deteriorating consumer confidence.
Inflation Expectations Rise
The most recent survey results revealed a sizable jump in the one-year inflation expectations component. It soared to 6.7%, up from 5% just last month. This sharp uptick is a sign that consumers are increasingly bracing for prices to not settle down in the short term. Additionally, the five-year inflation expectations ticked up as well, rising to 4.4% from 4.1%.
These rising inflation expectations are especially important, as they feed directly into consumer behavior and thus consumer spending. When consumers expect future prices to increase, they can change their buying behavior in a way that constrains economic growth. As you can imagine, the Federal Reserve keeps a close eye on this kind of data. Central banks’ most important mandate is controlling inflation, typically targeting around two percent.
The broader effects of these increasing inflation expectations go well past U.S. consumer confidence. Economists have been sounding the alarm on core inflation. This measure minus the volatile components, such as food and energy, serves as a predictor for economic well-being. Looking specifically at current trends, doves may want to rethink their calls for continuing easy monetary policy in light of these import-induced inflationary pressures.
Currency Markets React
As inflation concerns continue to plague the US economy, the US Dollar has come under intense bearish pressure in response to these sentiments and broader economic concerns. The Dollar Index was on the backfoot last seen down 1.3% on the day, closing out at 99.62. Analysts attribute deepening trade tensions between China and the United States as one main culprit for this drop. They point to recent recession worries and weaker-than-expected PPI data as other factors.
The unexpected plunge in July’s Producer Price Index (PPI) report sent more inflationary worries rippling through the economy—pushing inflation fears all the more to the frontlines in nearly every sector. No wonder core inflation captures the imagination of economists and central bankers. The moment a whiff of inflation is detected, the call to raise interest rates goes up in a flash.
Higher interest rates typically have a negative impact on gold holdings. They tend to increase the opportunity cost of holding non-yielding assets such as gold versus relatively lower yielding alternatives. Lower inflation usually gives gold prices a lift. This occurs since it would presumably result in lower interest rates, thereby making gold a more appealing place to invest dollars.
Consumer Outlook Darkens
The cumulative drop in consumer sentiment is symptomatic of a heightened trepidation about the overall economic climate. Even as inflation expectations are rising and fears of impending unemployment spread, consumers will be the first to horde their dollars and cut spending. This risk-averse posture can have a multiplier effect across the economy. It will delay investment and negatively affect industry across all sectors.
On top of that, the reported uptick in the share of consumers expecting higher unemployment is especially worrisome. Most disturbingly, it shows a deepening erosion of confidence in the labor market, the bedrock foundation needed to maintain any economic momentum. The more uncertain consumers are on their financial futures, the less likely they are to spend.
Together, these factors contribute to a dire picture for policymakers. Widespread rising inflation and consumer uncertainty spell big challenges. We might have to deploy some smart, targeted PR fixes to calm nervous consumers and keep the economy steady.