Consumer sentiment falls sharply

Inflation is taking a big toll on the mood of the nation’s consumers.

The University of Michigan’s preliminary consumer sentiment index for the first half of February fell to 61.7 — its lowest since October 2011 — from 67.2 in January. The decline in sentiment was entirely among households with incomes of $100,000 or more.

The current conditions index fell to 68.5, the lowest since August 2011, and down from 72 in January. The future expectations index dropped to 57.4 from 64.1 in January.

The survey's one-year inflation expectations rose to 5.0%, highest since July 2008, and up from 4.9% in January. The inflation five-year outlook held steady at 3.1%.

The impact of higher inflation on personal finances was cited by one-third of all consumers, with nearly half of all consumers expecting declines in their inflation adjusted incomes during the year ahead, according to the report. In addition, fewer households cited rising net household wealth since the pandemic low in May 2020, largely due to the falling likelihood of stock price increases in 2022.

“The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government's economic policies, and the least favorable long-term economic outlook in a decade,” Richard Curtin, chief economist, Surveys of Consumers, University of Michigan.

The recent declines have meant that the Sentiment Index now signals the onset of a sustained downturn in consumer spending, according to Curtin. The depth of the slump, however, is subject to several caveats not present in prior downturns, including the impact of unspent stimulus funds, the partisan distortion of expectations and the pandemic's disruption of spending and work patterns.

“Households have amassed substantial savings and reserve funds from the stimmies as well as due to more limited consumption choices, especially services,” Curtain said. “There may be a lessened need for additional precautionary savings and a greater desire to engage in discretionary spending.”