Consumer sentiment plunges on Omicron, inflation

Concerns over rising prices and the Omicron variant weighed heavily on consumers’ minds regarding the economy throughout January.

Consumer sentiment in January fell 4.8%, sinking to the lowest level since November 2011, according to The University of Michigan’s consumer sentiment survey. The slump was due to two sharp declines separated by a brief interlude of rising optimism.

The initial steep decline occurred in just two months, a 28.9% plunge in optimism from February to April 2020 due to the shutdown in the economy. Confidence recorded an equally strong recovery beginning in late 2020, and rising 23.0% by April 2021. But the upturn was reversed during the past nine months, with the Sentiment Index falling by 23.9%.

While consumers’ primary concern is rising inflation and falling real incomes, they may misinterpret the Fed's policy moves to slow the economy as part of the problem rather than part of the solution, warned Richard Curtain, chief economist, Surveys of Consumers, University of Michigan. “The danger is that consumers may overreact to these tiny nudges, especially given the uncertainties about the coronavirus and other heightened geopolitical risks,” he said.

Curtain noted that household spending had been supported by an extraordinary pace of rising home and stock prices that is likely to turn negative in the year ahead, according to Curtain. Also, overall confidence in government economic policies is at its lowest level since 2014, and the major geopolitical risks may add to the pandemic active confrontations with other countries.