Inflation Fears Continue to Drag Consumer Expectations Lower
The Consumer Confidence Index from The Conference Board fell again in June, the second drop in a row and seventh in the last twelve months. The composite index decreased 4.5 points or 4.4 percent to 98.7, the lowest level since February 2021 (see top of first chart). From a year ago, the index is down 23.4 percent. The decline was concentrated in consumer’s expectations for the future.
The expectations component sank 7.3 points, or 9.9 percent, to 66.4 (see middle of first chart) while the present-situation component – one of AIER’s Roughly Coincident Indicators – fell just 0.3 points to 147.1 (see bottom of first chart). The expectations index is down 38.8 percent from a year ago and is at its lowest level since March 2013. The index is below the readings just before the start of three of the last four recessions.
Within the expectations index, all three components fell versus May. The index for expectations for higher income fell 2.0 points to 15.9 while the index for expectations for lower income rose 0.7 points, leaving the net (expected higher income – expected lower income) down 2.7 points to 0.7.
The index for expectations for better business conditions fell 1.7 points to 14.7 while the index for expected worse conditions rose 3.1 points, leaving the net (expected business conditions better – expected business conditions worse) down 4.8 points to -14.8.
The outlook for the jobs market weakened in June as the expectations for more jobs index fell 1.2 points to 16.3 while the expectations for fewer jobs index rose by 2.5 points to 22.0, putting the net down 3.7 points to -5.7.
For the present situation index components, current business conditions and employment conditions weakened slightly. The net reading for current business conditions (current business conditions good – current business conditions bad) was -3.4 in June, down from -1.9 in May. Current views for the labor market saw the jobs hard to get index decrease, falling 0.8 points to 11.6 as the jobs plentiful index fell 0.6 points to a still-strong 51.3 resulting in a 0.2-point gain in the net to 39.7. A net above 40 is considered strong by historical comparison.
Inflation expectations rose to 8.0 percent in June, a record high; expectations were 4.4 percent in January 2020 (see second chart). The sharp rise in expected inflation from The Conference Board survey is consistent with the University of Michigan survey results, though the magnitudes are different (see second chart). Inflation expectations remain extremely high as prices for many goods and services continue to rise at an elevated pace. The extreme outlook for inflation is a key driver of weaker expectations among consumers.
The surge in prices for many consumer goods and services is largely a function of shortages of materials, a tight labor market, and logistical issues that prevent supply from meeting a post-lockdown-recession surge in demand, though there has been significant progress boosting production. Price pressures have been compounded by surging energy prices as a result of the Russian invasion of Ukraine and periodic lockdowns in China. Furthermore, the intensifying Fed tightening cycle raises the risk of a policy mistake and adds to the extreme level of risk and uncertainty in the overall economic outlook.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
