Consumer confidence plunges to 6-month lows, but that’s not the worst part

A leading indicator of consumer confidence plunged in November to a six-month low, as Americans downgraded their outlook on the economy and inflation.

The University of Michigan’s consumer sentiment index fell by 5.3% to 60.4 in November, its fourth consecutive monthly decline. A lower reading suggests consumers are less optimistic about the economy or their financial position.

The survey’s tracker of economic conditions fell by 6.9%, and the index of consumer expectations was down by 4%.

Perhaps the most troubling trend from the November report was the uptick in inflation expectations.

According to the survey, 12-month inflation expectations shot up to 4.4% in November, compared to 4.2% in October and 3.2% in September.

Long-run inflation expectations rose from 3% to 3.2%, the highest since 2011.

As bad as inflation is right now, the problem could get worse if inflation expectations become entrenched.

The problem with inflation expectations

Inflation expectations are the rate at which people expect prices to increase in the future, but they still affect prices in the here and now. According to the Brookings Institution, if inflation expectations rise by one percentage point, actual inflation will increase by the same amount.

Using the Michigan survey as an example, if consumers expect prices to rise by 4.4% over the next 12 months, businesses will seek to raise prices by at least that amount. And workers will demand their wages rise on par with inflation.

“People behave in accordance with their expectations and with their sentiment and attitudes towards the economy,” said Joanne Hsu, director of the University of Michigan consumer sentiment survey.

Inflation expectations are so important, in fact, that the Fed uses them to determine the future path of interest rates.

The real concern is that inflation expectations are rising at the worst possible time for the average American consumer.

Consumer spending faces headwinds

Consumer spending powered the U.S. economy to a strong third-quarter growth rate of 4.9%, but economists warn that the good times won’t last.

“The combination of expectations for persistently high prices, high borrowing costs, and labor market weakness does not bode well for the prospect of continued strength in consumer spending and economic growth,” Hsu explained.

As CreditNews recently reported, job creation slowed significantly last month, while the number of Americans receiving extended unemployment benefits has risen for seven consecutive weeks.

Average wage growth has also slowed to pre-pandemic levels, leaving consumers with less cash to splurge on leisure and activities.

Against this backdrop, Fitch Ratings expects consumer spending to “markedly slow” in the fourth quarter before contracting early next year.