The U.S. economy seems to be on the up and up, but American consumers remain hesitant about their financial futures. While the Federal Reserve has been successful in cooling inflation without sending the economy into a tailspin, consumer sentiment is lagging behind pre-pandemic levels. According to a survey from the University of Michigan, December’s index reading showed sentiment had improved by almost 17% from a year earlier, but remained nearly 30% lower than in December 2019.
Joanne Hsu, director of consumer surveys at Michigan, explained that the main issue was the high cost of goods and services. Americans are still trying to come to terms with the fact that low inflation and interest rates are not the norm. However, economists wonder if the discourse on social media discussing a potential recession has made people feel worse about the economy than they should. This would help explain the continued resilience of consumer spending, despite concerns about financial instability.
There is also a feeling of whiplash from the runaway inflation that snapped the long period of low-to-normal price growth. Harvard’s Dynan explains that people are still angry about the inflation seen in 2021 and 2022. Consumers remain on edge as prices continue to creep higher. Dynan adds that people are more attuned to the cot of their daily expenses, like the bill for lunch, compared to their annual pay increase.
Despite consumer sentiment lagging behind pre-pandemic levels, there are some positive indicators. The annualized rate of price growth is moving closer to a level preferred by the Federal Reserve while the labor market remains strong. It seems that monetary policymakers have been successful in taming inflation without causing a recession. While there is a sense of uncertainty, there are also reasons for cautious optimism.
Inflation is a major factor impacting consumer sentiment. And while inflation might have cooled from earlier this year, it’s still having an effect. For example, the average price for a new car in the U.S. rose by 9.4% this year. Meanwhile, gas prices have almost doubled. The impact of high prices varies across demographics, too. Low-income earners have experienced a significant impact, Eswar Prasad, a trade policy professor at Cornell University, explained. This group spends more of its income on basics like food and gasoline, meaning that higher prices have more of a knock-on effect on their quality of life.
The concern around inflation has geopolitical implications, too. Central banks globally are grappling with the same issue. In Europe, policymakers have attempted to contain inflation by raising interest rates, despite concerns about the impact on an already slow economic recovery. Meanwhile, in Japan, the central bank has kept rates low, but the threat of soaring prices remains. The world is watching to see if the US can continue to manage inflation without creating a recession.