Consumers expressed less optimism than any other time in the past decade, including more negative prospects for their own finances as well as for the overall economy, according to the University of Michigan Surveys of Consumers.

The decline was due to rapidly escalating inflation combined with the absence of federal policies that would effectively curb a surging inflation rate, said U-M economist Richard Curtin, director of the surveys. While pandemic induced supply-line shortages were the precipitating cause, the roots of inflation have grown and spread more broadly across the economy, he said.

One-in-four consumers cited inflationary erosions of their living standards in November. Rather than gradually easing along with diminished shortages, complaints about falling living standards doubled in the past six months and quintupled in the past year. As a result, consumers anticipated declining inflation-adjusted incomes, and expected spending cutbacks to slow the overall pace of growth in the national economy during the year ahead, Curtain said.

“The real transient issue is the rapidly closing window when effective policy actions can be taken using modest nudges in interest rates,” he said. “While consumers still expect inflation to revert to a much lower level over the next five years, that anchor has begun to weaken: Long-term inflation expectations rose by 0.5 percentage points in the past year to 3.0%.

“If expected long-term inflation continues to increase in the first half of 2022 and into late 2022, it will make it more difficult to contain. Moreover, a long inflationary period will bring a renewed urgency for expanding relief payments from job losses to cover the inflationary erosion of living standards.”

Holiday spending exception

Consumers have a strong desire to resume more normal holiday gatherings with family and friends, and to use their accumulated savings to fund their celebrations and gifts despite significantly higher prices, Curtain said. While the holiday bye ends in January, the upward momentum in prices and wages will continue uninterrupted. Even when Biden’s social infrastructure program is finally approved, it will not immediately ease inflation nor wage growth, he said.

Surging inflation dims outlook for 2022
A greater share of households than anytime in the last decade expected to be worse off financially in November, largely due to rising inflation, Curtain said. Overall, 51% of all households reported that they expected their inflation-adjusted incomes to decline during the year ahead, up from 41% in October. Just 18% expected rising inflation-adjusted incomes during the year ahead, down from 25% in June and one year ago.

The anticipated year-ahead inflation rate was twice the expected gain in nominal incomes, for all households as well as across age and income subgroups.

Consumer Sentiment Index
The Consumer Sentiment Index declined in November to 67.4, down from last month’s 71.7 and falling to the lowest level in a decade. The Expectations Index fell to 63.5 from last month’s 67.9 and was well below last year’s 70.5. The Current Conditions Index fell to 73.6, down from last month’s 77.7 and the lowest level since August 2011.

Consumers expressed less optimism in the November 2021 survey than any other time in the past decade about prospects for their own finances as well as for the overall economy. The decline was due to a combination of rapidly escalating inflation combined with the absence of federal policies that would effectively redress the inflationary damage to household budgets. While pandemic induced supply-line shortages were the precipitating cause, the roots of inflation have grown and spread more broadly across the economy. One-in-four consumers cited inflationary erosions of their living standards in November. Rather than gradually easing along with diminished shortages, complaints about falling living standards doubled in the past six months and quintupled in the past year. Consumers anticipated declining inflation adjusted incomes (see the chart), and expected spending cutbacks due to rising inflation to slow the pace of growth in the national economy in the year ahead. With one important caveat: consumers have a strong desire to resume more normal holiday gatherings with family and friends, and to use their accumulated savings to fund their celebrations and gifts despite higher prices. While the holiday bye ends in January, the upward momentum in prices and wages will continue uninterrupted. Even when Biden's social infrastructure program is finally approved, it will not immediately ease inflation nor wage growth. The real transient issue is the rapidly closing window when effective policy actions can be accomplished by very modest nudges in interest rates and regulations. At present, consumers still expect inflation to revert to a much lower level over the next five years, but that anchor has begun to yield ground: long-term inflation expectations rose by 0.5 percentage points in the past year, to 3.0% in November. If expected long-term inflation continues to accelerate in the first half of 2022, it will make its containment more difficult, and even more so, if the rise continues into the last half of 2022. Moreover, a protracted inflationary period will bring a renewed urgency for expanding government relief payments from job losses to cover inflationary declines in living standards. There will be no more compelling precedent for consumers that the 5.9% inflationary adjustment in Social Security payments that will start in January 2022.