By Tom Ozimek
American consumers have grown more pessimistic as inflation fears surged to a 22-year high, flashing a warning sign for the U.S. economy.
The University of Michigan’s closely watched consumer sentiment gauge fell by 4 percentage points in November, to a reading of 61.3 percent.
The drop marks the fourth consecutive month of declines in the sentiment measure, with the deepening confidence slump coming as the twin geopolitical crises in Ukraine and Gaza show no sign of ending anytime soon.
Meanwhile, inflation expectations jumped for both the near- and long-term, reflecting consumer fears that the recent easing of price pressures would be short-lived.
U.S. consumers expect inflation to average 4.5 percent over the next 12 months and 3.2 in the next five years, per the University of Michigan survey. That’s up from 4.2 percent and 3.0 percent, respectively, that consumers predicted when asked in October.
In particular, the five-year inflation expectation reading is the highest in 22 years.
“Consumers appear worried that the softening of inflation could reverse in the months and years ahead,” Joanne Hsu, University of Michigan Surveys of Consumers director, said in a statement.
The jump in inflation expectations comes despite the fact that the Consumer Price Index (CPI), a measure of inflation, fell from 3.7 percent in September to 3.2 percent in October.
Still, despite the decline in the headline CPI measure, U.S. households are right to feel squeezed by high prices, experts say.
“The slower pace of inflation is little comfort to households still dealing with the cumulative effect of rising prices,” Greg McBride, chief financial analyst at Bankrate, told The Epoch Times in an emailed statement.
“The strain on household budgets is real with the Consumer Price Index up more than 18 percent in the past 3 years,” he added.
Business Conditions Gauge Plunges
Even though current assessments and future expectations for personal finances saw modest improvement in November, there was a notable deterioration in expected business conditions, per the University of Michigan survey.
“In particular, long-run business conditions plunged by 15 percent to its lowest since July 2022,” Ms. Hsu said.
The survey findings are consistent with recent labor market and business investment data.
The number of Americans filing new claims for unemployment benefits fell by 24,000 to a seasonally adjusted 209,000 for the week ended Nov. 18, the Labor Department said on Wednesday. That’s the lowest level in over a month, suggesting that the labor market remains relatively resilient despite the fact that the Federal.
But other data showed orders for long-lasting U.S. manufactured goods fell more than expected in October, in part due to a drop in orders for motor vehicles and parts amid strikes by the United Auto Workers (UAW) union against Detroit’s Big Three automakers.
“The fact that we are seeing a drop definitely suggests that the labor market is not cooling as quickly as markets or the Fed might have been expecting there,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“And then at the same time the fact that we have this slowdown in CapEx investment … that suggests that underlying momentum in the economy is beginning to fade so, largely still consistent with the soft landing thesis, but labor markets holding up better than expected,” Mr. Schamotta added.
The sharp decline in the University of Michigan survey’s expectations for business conditions comes amid persistent concerns about the negative effects of high interest rates.
The Federal Reserve has raised interest rates sharply from near zero in March 2022 to within a current range of 5.25–5.50 percent in a bid to quash soaring inflation.
Despite their rapid pace, the Fed’s rate hikes have yet to bring inflation down to the central bank’s 2 percent target, with the latest CPI inflation reading for October coming in at 3.2 percent.
Core inflation, which strips the volatile energy and food components and is a measure that the Fed pays especially close attention to when evaluating progress against its 2 percent inflation, came in at 4 percent in October, twice the target rate.
Looking ahead to the November CPI, the Federal Reserve Bank of Cleveland’s inflation “nowcast” model estimate suggests that the annual inflation rate will ease to 3.1 percent, a monthly decline of 0.1 percentage points.
Similarly, core CPI is expected to ease to 4.1 percent. While that would represent a slight softening in an inflation gauge closely tracked by the Fed, it would still be more than twice as high as its 2 percent target—and still painful for many U.S. consumers struggling to make ends meet.
Lingering Price Pressures?
Despite declines in the headline CPI inflation figures, there has been some re-acceleration in price pressures in parts of the U.S. economy.
In October, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) showed a revival of input price pressures in the manufacturing sector.
The ISM manufacturing prices index registered 45.1 percent in October, up 1.3 percentage points from the 43.8 percent reading in September.
By contrast, the latest data on business input costs, as reflected in the Producer Price Index (PPI), fell in October to a reading of 1.3 percent in annual terms, down sharply from September’s 2.2 percent pace.
However, the core PPI measure, which strips out food, energy, and trade services components, remained at an elevated 2.9 percent in October, down only slightly from September’s pace of 3.0 percent.
This paints a mixed picture of where inflation is heading, but with the core inflation readings remaining well above the Fed’s 2 percent target, some analysts say it’s much too early for the Fed to declare victory in its fight against inflation.
Despite a lack of clarity around where inflation goes from here, investors overwhelmingly expect that the Fed has reached the peak of its tightening cycle.
Fed funds futures contracts show a 95.2 percent probability that the Fed will hold rates steady at its next policy meeting on Dec. 13, 2023. They also show that, by spring of next year, the Fed will start lowering rates, with the first 25-basis point cut expected during the May 1, 2024 policy meeting.
“The Federal Reserve does not need to hike rates further in order to sustain the pressure already beginning to be felt by the economy,” ING’s regional head of research for the Americas, Padhraic Garvey, said in a recent analysis.
So far, the central bank’s interest rate moves have yet to bring inflation down to target, but they’ve driven up borrowing costs, starving the economy of credit and prompting warnings of recession and stagflation—a toxic combination of sluggish growth and high inflation.
“As these pressures build, concern morphs away from inflation and towards sub-trend growth, and possibly recession. That places rate cutting on the radar,” added Mr. Garvey, who sees the Fed cutting rates to around 3 percent by mid-2025.
ING analysts said in a separate note that they doubt the Fed will raise rates any further, in part due to significant weakness in loan demand caused by high interest rates, combined with an increased reluctance for banks to lend.
“This combination of sharply higher borrowing costs and reduced credit availability tends to be toxic for growth,” the ING team said, adding that they expect a recession in 2024 lasting at least two quarters, which will put downward pressure of inflation.
“In this environment, we see the slowdown in inflation regaining momentum in early 2024.”
