Consumer unease over inflation rekindled in August

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U.S. consumers tapped the breaks on their growing optimism in August as they watched gas prices climb and grew nervous about inflation in the coming year.

The University of Michigan’s index of consumer sentiment dipped from 71.2 in July to 69.5 near the end of August, following months of robust recovery.

Survey of Consumers Director Joanne Hsu said in a statement that the small decline was “not statistically different from July” and pointed out that consumers remained about as optimistic as they’ve been in nearly two years.

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Still, the sideways movement reflected a complex web of changing expectations by U.S. consumers that was different from the steady swell of optimism that had been developing in previous months.

“While buying conditions for durables and expectations over living conditions both improved, the long-run economic outlook fell back about 12 percent this month but remains higher than just two months ago,” Hsu said in the report.

Chart by University of Michigan

Still, Americans continue to be wary of inflation. Consumers broadly expect prices to rise 3.5 percent over the next year, up from an expectation of 3.4 percent the previous month. Those expectations remain elevated compared to what consumers expected before the pandemic began, when they ranged from 2.3 percent to 3.0 percent, Hsu said.

“Consumers perceive that the rapid improvements in the economy from the past three months have moderated, particularly with inflation, and they are tentative about the outlook ahead,” Hsu said.

This index is one of several that track changes in consumer sentiment over time. Policymakers look to surveys like these in part because people’s attitudes toward inflation can actually influence prices in the long run. If consumers expect prices to go up slowly, they may be less likely to purchase goods and services at higher inflation rates.

As consumers brace for elevated inflation rates, the Federal Reserve has remained publicly committed to taking steps to slow inflation, even at the expense of economic growth, Chairman Jerome Powell said in a speech Friday.

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” he said.

That doesn’t necessarily mean the Fed will continue raising rates, Powell clarified. But the improvements in government inflation readings in recent months have yet to convince policymakers — or consumers, for that matter — that the fight is over.

Meanwhile, the Fed’s ongoing inflation fight continues to have an outsized impact on the nation’s housing market. Mortgage rates remain more than double where they were throughout much of the pandemic housing boom, making it difficult for homeowners to justify listing their homes and locking in a much higher mortgage rate in order to move.

As long as interest rates remain this high, the rates on newly issued home loans and are likely to remain out of whack with those on existing loans. And a big chunk of potential home inventory could remain on the sidelines.

Email Daniel Houston