Consumer sentiment declined in March due to falling inflation-adjusted incomes, which was recently accelerated by rising fuel prices, according to the University of Michigan Surveys of Consumers.

The year-ahead expected inflation rate rose to its highest level since 1981 and expected gas prices posted their largest monthly upward surge in decades. Personal finances were expected to worsen in the year ahead by the largest proportion since the surveys started in the mid-1940s, said U-M economist Richard Curtin, director of the surveys.

Consumers also held very negative prospects for the economy, with the sole exception of the job market. Consumers were slightly more likely to anticipate declines rather than increases in the national unemployment rate. This strength will maintain consumer spending at moderate levels to late 2022, he said.

“Just when difficult decisions need to be made about monetary and fiscal policies, consumers have expressed loss in confidence in government economic policies,” Curtin said. “Moreover, most consumers are uncertain about the ultimate impact Putin’s war will have on their personal economic situation.

“Combating inflation is no easy task, and success often entails slowing growth and increasing unemployment. This time, however, any resulting slowdown is likely to be met with demands for subsidies by households and firms similar to what they received during the pandemic.

“This makes the policy challenge more difficult even if a soft-landing could be achieved. While consumer solidarity about policy choices is unrealistic, the widespread partisan divisions may stifle policy compromises and promote less favorable outcomes for all.”

Inflation challenge
Strong job growth will continue to put upward pressures on wages, resulting in higher income and more secure jobs, Curtin said. This strength will then act to expand consumer demand and motivate another cycle of price and wage increases.

“The self-perpetuating cycle acts to establish a self-fulfilling inflationary psychology,” he said. “Prevention of inflationary psychology is much less costly before it becomes ingrained in the economic behavior of consumers and firms. Confidence that economic policies can resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16% who rated them favorably.”

The growing domination of inflation
Consumers mentioned inflation throughout the survey, whether the questions asked about personal finances, prospects for the economy or assessments of buying conditions. When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past 50 years: from March 1979 to April 1981 and from May to October 2008.

The combination of rising prices and less positive income expectations meant that half of all households anticipated declines in inflation-adjusted incomes in the year ahead, Curtin said.

Consumer Sentiment Index
The Consumer Sentiment Index fell to 59.4 in the March 2022 survey, down from 62.8 in February and 84.9 last March—a 30% decline from last year. The Expectations Index fell to 54.3 in March, down from 59.4 in February and 31.9% from last year. The Current Conditions Index fell to 67.2 in March, down from 68.2 in February and 27.7% from last year.

Consumer Sentiment remained largely unchanged in late March at the same diminished level recorded at mid month. Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4%, the highest since November 1981. Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions. When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years: from March 1979 to April 1981, and from May to October 2008. Moreover, 32% of all consumers expected their overall financial position to worsen in the year ahead, the highest recorded level since the surveys started in the mid-1940s. The combination of rising prices and less positive income expectations meant that half of all households anticipated declines in inflation-adjusted incomes in the year ahead. The sole area of the economy about which consumers were still optimistic was the strong job market. Consumers anticipated in March that during the year ahead it was more likely that the unemployment rate would post further declines than increases (30% versus 24%).

Strong job growth will continue to put upward pressures on wages, resulting in higher income and stronger job prospects. This strength will then act to expand consumer demand and ultimately lead to another cycle of price and wage increases. These factors represent the necessary (but not sufficient) conditions for the development of inflationary psychology as a self-fulfilling prophecy. Prevention of inflationary psychology is much less costly before it becomes ingrained in the economic behavior of consumers and firms. Confidence that economic policies will resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16% who rated them favorably. Making the situation even more difficult, policy makers need to take account of two unusual sources of economic uncertainty, one rather minor (the new covid variant), and a major source of continued economic disruption (the Russian invasion of Ukraine).