Consumer sentiment rebounds in early December; inflation biggest concern

Inflation is far and away consumers’ primary worry regarding the economy.

The University of Michigan’s consumer sentiment index rose to 70.4 in December, up from 67.4 in November. It was still nearly identical to the average reading in the prior four months (70.6).

Sentiment regarding current conditions inched up to 74.6 from 73.6 in November. The indicator of expectations rose to 67.8 from 63.5 in the previous month.

The December report reflected consumers’ concerns about inflation.  When asked whether inflation or unemployment was the more serious problem facing the nation, 76% selected inflation. Only 21% selected unemployment. (The balance reported the problems were equal or they couldn't choose.) The University of Michigan report was released the same day that the government released data showing consumer prices increasing 6.8% during the past year, the highest in 39 years.  

“The dominance of inflation over unemployment was true for all income, age, education, region, and political subgroups,” said Richard Curtin, chief economist, Surveys of Consumers, University of Michigan. “While a shift in policy emphasis is necessary, it will be difficult to gauge the right balance between fiscal and monetary policies that both trims inflation and maintains the unemployment rate near its current lows.”

According to Curtain, the most interesting result of the December survey was the large disparity between the monthly gain among households with incomes in the lowest third (+23.6%) of the income distribution compared with the modest losses among households in the middle (-3.8%) and top third (-4.3%). While small differences in the direction of change are rather common, he noted, it is unusual to record such a large change in the bottom third: a larger one-month percentage was recorded only once before, a gain of 29.2% in June 1980.

Curtain noted that, in 1980, it was the households in the bottom income third that initially signaled the end of the first part of the double recession in 1980-82, with upper income households following in subsequent months. The core of the renewed optimism among the bottom third was the expectation of income increases of 2.9% during the year ahead; the last time a higher gain for this group was expected was in 1981.

“This suggests an emerging wage-price spiral that could propel inflation higher in the years ahead,” he warned.  

In the months ahead, Curtain said, many consumers may turn their focus to changes in wages and prices.  

“The inflationary erosion of living standards are currently reported by one-in-four households, and those inflationary driven cutbacks have continued to spread to middle age, middle income, and middle educational groups,” he added.