After plunging in August amid inflation fears and Delta wave concerns, consumer sentiment remained subdued in September, the preliminary read on the University of Michigan’s gauge suggested.
At 71, the headline print missed estimates (72) and represented almost no improvement from the decade low hit last month (figure below).
“Some observers anticipated that the early August plunge in confidence would quickly disappear since it was driven by emotions,” the survey said. “A more accurate reading is that consumers correctly assessed the economic impact of the resurgent Delta variant.”
Last weekend, while previewing this week’s data docket, I said “there’s not much to suggest that consumers’ mood should have improved” from August. It appears that was an accurate assessment.
Indeed, the current conditions index fell again, to 77.1 from 78.5. Expectations improved at the margins, but buying attitudes are still depressed and, as the color accompanying the survey noted, long-term economic prospects are at a decade low.
“The decline in assessments of buying conditions for homes, vehicles, and household durables left all three near all-time record lows, with the declines due to spontaneous references to high prices,” the survey’s chief economist Richard Curtin remarked.
The report marked a somewhat unceremonious end to a week of otherwise upbeat data. Most obviously, August CPI handed the “transitory” camp a small win, while retail sales came in much stronger than expected, even as the details raised more questions about services spending. Empire manufacturing was strong and import prices fell for the first time in nearly a year.
The disconnect between sentiment and equities remains glaring (figure below).
That disparity is now mirrored in various measures of growth expectations, which have similarly decoupled from stocks.
Inflation expectations in the Michigan survey were sticky — higher. The expected change in median prices during the next year rose to 4.7% from 4.6% last month, while five- to 10-year expectations were unchanged at 2.9%. Earlier this week, the New York Fed’s survey showed medium-term expectations rose to 4%, a series high.
Commenting further on Friday, Curtin suggested three “potential reactions” to inflation. The first was simply that consumers may postpone purchases on the assumption it’s transitory. The second involves a scenario where workers demand higher wages as an inflationary mindset become more entrenched.
Finally, Curtin noted that “the effectiveness of pandemic transfers were shown by their successes in offsetting hardships among those most vulnerable to economic disparities [so] transfers to offset the inflationary erosion of living standards could be justified in a similar manner.”
I’m reluctant to resort to the obvious punchline, but I’m afraid there’s no getting around it: To the extent policy largesse is contributing to inflation, we’re now contemplating more policy largesse to alleviate the pain from the price increases we may have exacerbated.