US consumer sentiment hits 10-year low with inflation fears surging

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US consumer sentiment has weakened to its lowest level in a decade, reflecting Americans’ concerns about rising prices and a belief that the Biden administration has failed to address the surge in inflation.

The University of Michigan’s consumer sentiment index slipped to 66.8 in November, according to a survey published on Friday. That was down from 71.7 in October and well below economists’ forecast for a stronger reading of 72.4.

The decline in sentiment this month came amid “an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation”, said Richard Curtin, chief economist of the university’s consumer surveys.

The drop-off in consumer sentiment came alongside fresh evidence that the nationwide worker shortage is becoming more pronounced as the number of people quitting their jobs reached new heights. Data released on Friday showed a record 4.4m Americans quit their jobs in September while the number of job openings remained near a record high.

“Today’s report looked consistent with labour supply struggling to meet labour demand, with firms having a hard time filling positions and workers able, or confident in their ability, to find other jobs,” said Daniel Silver, an economist at JPMorgan.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, said the data gives credence to the view that wages will need to rise further to attract workers, which is likely to feed into even higher inflation.

One-quarter of consumers in the Michigan survey cited inflation-related reductions in their living standards, which hit lower-income and older consumers the most. Consumers reported nominal income gains, but half of all families said they anticipated lower incomes next year when adjusted for inflation.

The Biden administration has been rushing to reassure Americans that it is focused on fighting inflation as rising prices threaten to undercut the recovery from the pandemic.

That messaging took on a new urgency this week after data showed consumer prices had risen 6.2 per cent in October from a year ago, the fastest pace in 30 years, as inflationary pressures broadened throughout the economy beyond sectors linked to the reopening from the pandemic.

During a visit to the Port of Baltimore on Wednesday, after the data was released, Joe Biden acknowledged the pressure that inflation was putting on family budgets. “Everything from a gallon of gas to loaf of bread cost more,” he said. “It’s worse even though wages are going up. We still face challenges.”

Senior officials at the Federal Reserve, including chair Jay Powell and Richard Clarida, the vice-chair, have previously said they expect the sharp rise in inflation over the past few months will prove “transitory” and fade over time as supply-chain disruptions are fixed and labour markets steady. But the recent inflation readings have challenged that view, economists say.

“The description that inflation would be ‘transient’ has the undertone that consumers could ‘grin and bear it’ as economic policies counted on a quick and automatic self-correction to supply and labour shortages,” Curtin said.

“Instead, the pandemic caused economic dislocation unlike any prior recession, and has been intertwined with partisan interpretations of economic developments.”

Respondents in the survey reported rising prices for homes, vehicles and durable goods more frequently than any other time in more than half a century, according to Curtin.

Consumers’ inflation forecasts for the year ahead edged up by 0.1 percentage points to 4.9 per cent, the highest since July 2008. Their five-year outlook held steady at 2.9 per cent.

Market measures of inflation expectations point to a more subdued outlook, although they have moved up significantly in recent days.

The 10-year break-even rate, one popular measure, jumped to 2.73 per cent on Friday, a level last reached in 2006.

“High prices are taking a bite out of spending power, but the effect that will have on the level of spending is probably low given Americans are flush with cash, have months of pent-up demand and are ramping up spending month after month regardless of inflation fears,” said Robert Frick, corporate economist at Navy Federal Credit Union.

Analysts at Oxford Economics also noted that consumers have “continued to spend at a healthy clip” despite inflationary pressure. However, they said supply-chain headaches will probably worsen in the fourth quarter, suggesting that consumer sentiment will also struggle to bounce back this year.

Additional reporting by Mamta Badkar in New York



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