by SchiffGold  0   0

Joe Biden is telling us the economy is back on track. And the Federal Reserve insists it can slow down the inflation freight train. But the average American isn’t quite so sanguine.

Consumer sentiment plunged to the second-lowest level in a decade in January, according to the University of Michigan Surveys of Consumers.

The Index of Consumer Sentiment dropped 2.5%, falling to 68.8. That was just above the 67.4 reading two months ago – the lowest level in 10 years. The consensus expectation was for a more modest drop to 70.0.

The Index of Consumer Expectations also plunged, falling from 68.3 in December to 65.9 in January.

Looking at the longer trend, consumer sentiment averaged 70.3 over the last six months. That compares with an average of 82.9 through the first six months of 2021.

According to the University of Michigan report, COVID-19 concerns have contributed to the downward shift in consumer confidence, but the real concern is high persistent inflation.

Three-quarters of consumers in early January ranked inflation, compared with unemployment, as the more serious problem facing the nation.”

The CPI for 2021 came in at 7%. It was the highest annual CPI gain since 1982. Keep in mind, this is using the cooked government CPI formula that understates inflation. If the government still used the CPI formula it used in 1982, inflation would be higher in 2021 than it was then. In fact, we’d have the highest level of inflation in history.

While the Fed needs inflation expectations to remain “anchored,” it appears the anchor has pulled loose. Consumers expect inflation to persist. The survey’s one-year inflation expectation rose from 4.8% to 4.9%. Its five-year inflation outlook ticked up to 3.1% from 2.9% in December.

The Federal Reserve and government officials have downplayed inflation for the last year. But the talk doesn’t fool American consumers who feel the impact of rising prices directly in their wallets.

The University of Michigan report noted that inflation disproportionately impacts people with lower incomes.

Given that inflation’s impact is regressive, the Sentiment Index fell by 9.4% among households with total incomes below $100,000 in early January, but rose by 5.7% among households with incomes over that amount.”

Even among more optimistic, higher-income earners, they are still more likely to anticipate bad economic times in the year ahead.

The survey also found that Americans are skeptical of the government’s ability to address the economic problems. Confidence in government economic policies fell to its lowest level since 2014.

Americans also report that their finances aren’t in very good shape as inflation bites into their purchasing power. Thirty-three percent of the respondents said they were worse off financially than a year earlier. That was just one point higher than the 32% shutdown low in April 2020.

Some pundits have tried to downplay inflation, claiming that wages rise along with prices and it is effectively a wash. But American consumers don’t buy this narrative.

Nearly half of all consumers (48%) anticipated that the inflation rate would outdistance income increases to produce real income declines. Just 17% anticipated real income gains in 2022.”

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The data reveals their fears are not unwarranted. Wages are not going up as fast as prices. Real wages (nominal wage increases minus CPI) were down 2.4% in 2021. That means even if you got a raise, you most likely lost purchasing power. And you’ve lost even more than the official numbers reveal. If you use an honest inflation measure, real wages were down somewhere in the neighborhood of 10.4%.

Consumer sentiment can impact future economic activity. If Americans are concerned about their finances, they will adjust spending accordingly. This can slow down a struggling economy even further.

Last summer, economic commentator Wolf Richter warned we could find ourselves in an inflationary spiral as price spikes cascade from product to product and service to service.

This surge of inflation is becoming engrained in the inflation expectations of company decision-makers and consumers alike. They’re adjusting to it and in this manner inflation becomes persistent.”

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