Consumers are doubtful the Fed will tame inflation anytime soon
The economy has been booming for most of 2023, but consumer confidence may be taking a turn for the worse.
A new report shows that consumer sentiment—a measure of how optimistic or pessimistic people are about the current and future state of the economy—dipped slightly in August, raising concerns about everything from jobs to GDP growth.
The University of Michigan consumer sentiment index, one of the most widely used consumer sentiment indicators in the U.S., fell to 69.5 in August from 71.6 in July (a higher reading signifies greater confidence).
Economists were expecting consumer sentiment to hold steady.
Although the dip doesn’t appear noteworthy on its face, the details suggest consumers’ expectations about the economy are worsening. Their views on the long-term economic outlook declined by about 12%.
It appears that everything about the future is keeping Americans up at night.
Fretting about the future
Overwhelmingly, Americans’ biggest concern is high inflation. Specifically that it will be sticking around for longer than expected.
Consumer sentiment had improved throughout the summer on optimism that rapid improvements in inflation would continue. But that changed last month after the Department of Labor reported a slight uptick in consumer prices.
And while inflation has moderated from its peak of 9.1% in June 2022, it remains well above the Fed’s 2% target.
To combat inflation, the Fed has raised interest rates 11 times in 17 months. The fight is far from over.
The UofM’s index of consumer expectations was the worst-performing confidence measure in August. It fell 4.1% compared to July. The overall consumer sentiment index remains well below its historic average of 86.
For all the talk of economic recovery, consumer confidence hasn’t returned to pre-pandemic levels. The political environment could also be taking a toll.
Consumer sentiment’s effect on the economy and stock market
Consumer sentiment is a leading indicator of economic health, which is why its recent decrease could be a concern for policymakers and Wall Street.
Although it could be a temporary slowdown, concerns about inflation might cause consumers to rethink their spending.
Some economists think expectations about inflation are just as important as inflation itself; if consumers expect prices to go up, they could alter their spending habits.
This is a big deal because consumer spending is two-thirds of U.S. GDP. If it falls, it will drag the whole economy down with it. Corporate profits and stock prices will follow.
If inflation remains high, the Fed might choose to further increase interest rates to curb spending. Wall Street is placing fairly high odds that another Fed hike is coming this year.
As a result, Americans may have to deal with higher interest rates on their credit cards and loans in the near future.