Consumer sentiment fell in July, posting a monthly decline of 5.0% from June, falling to the lowest level since February, according to the University of Michigan Surveys of Consumers.

Nearly the entire July decline was among households with incomes above $100,000 (-8.1%), while sentiment among households with incomes below $100,000 posted only a modest decline (-1.1%), said U-M economist Richard Curtin, director of the surveys.

The largest declines were concentrated in the outlook for the national economy and how consumers viewed buying conditions for homes, vehicles and household durables.

Consumers anticipated that the inflation rate would remain at high levels throughout the year ahead, half of all consumers expected additional declines in unemployment within a year, and two-thirds anticipated interest rates would rise by mid-2022.

The risks that a higher inflation rate persists well into 2022 have grown due to the greater willingness of consumers to purchase due to their record savings and higher wages due to labor shortages, Curtin said.

“Most consumers expect the spike in inflation will be transitory, given that every comparable rise since 1990 was short-lived,” he said. “Resistance to price increases has been greatly reduced, whether justified by history, by the pandemic or by record increases in savings.

“The old inflationary psychology was based on greater variance in inflation than incomes, and the emerging psychology is due to greater expected variance in incomes than prices. Rising wages, expanded transfers and federal job creation programs will reduce income inequalities and boost economic growth. Prices, however, will eventually outdistance wages and cause a falloff in spending.”

Widespread awareness of rising prices
Complaints about high prices for homes, vehicles and household durables rose to their highest level in more than a half century. These complaints were given as justification for lowering their buying attitudes to their lowest level since 1982, Curtin said.

“Importantly, the improved savings balances of households will offset some of their resistance to higher prices, allowing them to make some long-postponed purchases in the second half of 2021 especially for services,” he said. “An extensive impact from the Delta variant is a significant risk to the service industries.”

Slower growth in economy expected
Although twice as many consumers in July expected the economy to improve as worsen in the year ahead (45% vs. 21%), the balance of opinion was much closer about whether they anticipated this would mean good or bad times in the overall economy (50% vs. 41%). Moreover, when consumers were asked about the longer-term prospects for the economy, the balance of opinion was negative, as a continuous expansion was judged less likely than another downturn sometime in the next five years (38% vs. 50%).

Consumer Sentiment Index
The Consumer Sentiment Index fell to 81.2 in July 2021 from June’s 85.5, and the lowest level since 76.8 was recorded in February. The Expectations component fell to 79.0 in July from June’s 83.5, but was well above last July’s 65.9. The Current Conditions Index fell slightly to 84.5 in July, down from June’s 88.6 and barely above last July’s 82.8.

Consumer sentiment edged upward at the end of July, although it still posted a monthly decline of 5.0%. The largest monthly declines remained concentrated in the outlook for the national economy and complaints about high prices for homes, vehicles, and household durables. While most consumers still expect inflation to be transitory, there is growing evidence that an inflation storm is likely to develop on the not too distant horizon. The improved finances of consumers have greatly reduced consumers' resistance to price increases. While firms have reacted to their own supply and labor shortages with a greater readiness to increase prices as well as wages. Consumers and firms currently justify their actions as temporary adjustments due to the pandemic. However justified, such changes act to generate an upward spiral in prices and wages. Moreover, the fiscal and monetary policies already in place, and the likely increases and continued accommodation now contemplated, will only increase the willingness of consumers and firms to act in ways that accelerate the upward spiral in prices and wages. This reaction by consumers is unique, and quite different from the inflationary psychology of the 1970s. In that earlier era, the booms were driven by the willingness of consumers to advance their purchases in an attempt to avoid future price hikes, now the coming boom will be due to income and job gains that make price increases easier to manage, with the gains generated by federal transfers and physical and human infrastructure programs. The beneficial reduction in income inequality will shift more money to those who have higher propensities to spend, and thus energize demand. The booms will end in the same way as usual: rising prices will eventually outdistance wage gains, lowering living standards, and cause an economy-wide retrenchment in spending.