Sentiment Survey Reveals Unprecedented Disparities

Consumers’ expectations for inflation were unchanged in early December, the preliminary read on the University of Michigan’s sentiment survey suggested.

That’s not the best news. Perhaps a more accurate way to put it would be to say that consumers’ perceptions of price pressures both in the near-term and over the next five years remained extremely elevated.

The expected change in inflation over the next year stuck at 4.9%, the same as the November survey and the highest in a dozen years. Longer-term, consumers see inflation running at 3%, also unchanged from the prior month.

Earlier Friday, November CPI data showed inflation running at the hottest annual rate since 1982, underscoring the urgency of the situation and ostensibly arguing for tighter Fed policy “next week,” as one analyst put it, only half joking.

Perhaps the more interesting takeaway from the Michigan survey was the marked disconnect between Americans’ assessment of their current circumstances and their outlook. The figure (below) shows an unprecedented divergence.

“While consumers’ evaluations of their current and prospective financial situation have both declined, for the first time there has been a substantial gap between the two assessments,” the survey’s chief economist Richard Curtin wrote Friday.

The magnitude of the deterioration in how consumers judge their financial prospects is around twice that of the fall in how Americans perceive their existing circumstances. “The split is presumably due to the impact of the cash stimulus and unemployment payments,” Curtin remarked, adding that “future financial evaluations have been lessened primarily by rising inflation.”

Almost half of respondents expect their real incomes to decline over the next 12 months. That’s precisely the perception that the Biden administration is keen to counter. On Thursday, ahead of Friday’s CPI report, The White House attempted to allay concerns by noting that November’s data doesn’t capture recent declines in energy prices. That won’t stop “inflation” from trending on social media, neither will it compel cable news to change their weekend chyrons declaring the highest inflation in four decades.

The main sentiment indexes (the headline gauge, the current conditions and the expectations index) were mostly staid in the preliminary results for this month. In fact, all three rose slightly.

And yet, Curtin noted that the “small overall gain” in sentiment “was still nearly identical to the average reading in the prior four months.”

That’s suboptimal, to put it nicely. The main index plunged to a decade low in August and hasn’t really budged since (figure above).

Notably, Curtin also described a “large disparity” between lower-income households (whose mood improved) and households in the middle- and top-third.

“The core of the renewed optimism among the bottom third was the expectation of income increases,” he said, flagging the biggest expected year-ahead gain since 1981. “This suggests an emerging wage-price spiral that could propel inflation higher in the [coming] years,” he added.