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  • Inflation Drop Boosting Consumer Sentiment: UMich's Hsu

Inflation Drop Boosting Consumer Sentiment: UMich's Hsu

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Bloomberg Jun 16, 2023 23:31 · 21.1k Views

University of Michigan Surveys of Consumers Director Joanne Hsu discusses the key takeaways from the latest consumer sentiment survey with Alix Steel and Guy Johnson on "Bloomberg Markets.". Americans expect prices will climb at an annual rate of 3.3% over the next year, the lowest since March 2021, according to the preliminary June reading from the University of Michigan.

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Transcript

  • 00:00 Joanne, how should we be reading this data?
  • 00:03 Well, this improvement that we saw this month is primarily being supported by two things.
  • 00:07 One is the
  • 00:09 resolution of the debt ceiling crisis, which had really created a sense of unease among consumers.
  • 00:15 And of course, more importantly and most importantly is the slowdown in inflation.
  • 00:19 This is something that consumers have noticed in a number of arenas, not just gas prices, but durables, autos and cars
  • 00:26 and and houses as well.
  • 00:28 And and consumers have notice that
  • 00:30 Joanne, I mean that that one year inflation expectation is a pretty chunky drop down to 3.3%.
  • 00:35 Do you expect it to stay
  • 00:37 at that level?
  • 00:39 Well, for the last couple of years
  • 00:41 since the rise of inflation,
  • 00:43 uncertainty around inflation has been quite elevated.
  • 00:46 And in fact, earlier in 2023 inflation expectations, this one year number bounced back and forth for four straight months.
  • 00:54 Now we have 2 consecutive months of
  • 00:57 of the inflation expectations coming down.
  • 00:59 I think that is the trend.
  • 01:01 It may still wiggle, but I don't expect it to spike in the way that we were seeing
  • 01:05 before.
  • 01:06 Do you think the Fed should be happy or unhappy with what they see in your data?
  • 01:11 I think it they should definitely be heartened by the fact that consumers
  • 01:15 are passing through what they see in the slowdown in inflation into their expectations.
  • 01:20 But I do need to point out that while the one year expectations have come down so dramatically,
  • 01:25 the five to 10 year, the long run expectations have remained extremely stable.
  • 01:30 For the past two years it's been between 2.9 and 3.1%
  • 01:35 which is elevated relative to the two years prior to the pandemic that hasn't moved at all.
  • 01:39 No, fair enough.
  • 01:40 I mean, it's been super sticky, right?
  • 01:41 At that level.
  • 01:42 Joanne, can we break down the sentiment or the feelings
  • 01:46 around inflation based on income group?
  • 01:48 Can you talk us through what you're noticing on that level?
  • 01:50 Actually,
  • 01:51 the optimism on inflation
  • 01:54 cuts across all different demographic groups, high income and low income consumers,
  • 02:00 older, younger, more educated, less educated, everyone seems to believe
  • 02:04 that inflation is slowing down in the year ahead.
  • 02:06 Yeah.
  • 02:07 What do you think?
  • 02:08 What is your data tell you about the connection between the labor market and what people experience, what people expect when it comes to inflation, Joanne?
  • 02:18 I mean I think that is a
  • 02:21 definitely
  • 02:22 a a an interesting question, particularly given the very strong labor market.
  • 02:25 I think that the labor market strength is is really something that's going to affect more
  • 02:30 on consumers willing to spend and their overall sentiment than their inflation numbers
  • 02:35 per per SE.
  • 02:36 So far can strong consumer spending has been
  • 02:39 supported by a strong labor market.
  • 02:41 But one possible factor that may cause policy makers pause is the fact that consumers are starting to exhibit
  • 02:48 some signs of weakness or they're starting to expect some signs of weakness in in the labor market, particularly younger consumers.
  • 02:55 Interesting.
  • 02:55 Joanne, are we seeing any fatigue here, consumer fatigue
  • 02:59 anywhere?
  • 03:00 Well, they're certainly tired of inflation.
  • 03:02 So the the fact that
  • 03:04 inflation is slowing down is definitely good news.
  • 03:06 But 434243 percent of consumers still
  • 03:10 are telling us that high prices are weighing down
  • 03:13 their living standards and they're still complaining about high interest rates
  • 03:17 for for cars, durables and and homes.
  • 03:20 So they are tired of this situation.
  • 03:23 But so far
  • 03:25 seeing things are definitely looking better for them than they were a year ago
  • 03:29 when sentiment was at his all time low last June.
  • 03:33 John, it's interesting the the
  • 03:35 the two year initially dipped the yields
  • 03:38 when your data dropped onto our screens.
  • 03:39 It's now climbed back.
  • 03:42 If if you were to look at the totality of the data here and I want to come back to the question I asked you about how the Fed should be reading this.
  • 03:48 Is the Fed going to look at this number and say we're not hitting the consumer hard enough?
  • 03:52 Yes, inflation expectations are coming down, but we probably think a lot of that is gas
  • 03:56 and as a result of which
  • 03:57 basically this is a tax break that has been given to the consumer who are then going to spend
  • 04:02 that extra money and that's going to continue to ultimately support inflation over the long run.
  • 04:06 Is that a reasonable take away from the data we are seeing?
  • 04:10 That's one possible take away, but it's certainly not the only take away
  • 04:14 the fact that consumers are starting to see some weakness in the labor market.
  • 04:18 There are a number of most demographic groups actually downgraded their expectations for both inflation adjusted as well as nominal income over the year ahead.
  • 04:27 Which means that in spite of the fact that prices do seem to be more manageable for consumers, they don't necessarily have the incomes to support it.
  • 04:34 So
  • 04:35 it's not necessarily that the case that
  • 04:38 this increase in sentiment that these, this improvement in inflation expectations is going to lead consumers to go gangbusters in the months ahead.
  • 04:45 Butt butt, butt, butt, butt guy.
  • 04:46 This does raise the question of
  • 04:48 is are we actually in a soft landing.
  • 04:50 Sure we're not go gangbusters.
  • 04:51 That's not a bad thing.
  • 04:52 But being able to still feel okay and buy the stuff you need to while you're feeling about inflation roll over.
  • 04:57 Like, isn't that thing the Goldilocks a soft landing that.
  • 05:00 Well, this is so
  • 05:01 far off.
  • 05:01 It's
  • 05:02 interesting that the Fed in some ways has separated out what's happening with the labor market and what is happening with inflation.
  • 05:08 Certainly some of the latest
  • 05:09 research that beings done maybe suggested that connection
  • 05:13 isn't as tight as as we thought it was.
  • 05:14 So yeah, inflation expectations come down.
  • 05:17 That is a good thing.
  • 05:18 That's ultimately what the Fed wants because it doesn't get embedded into the into the labor market in terms of wages.
  • 05:24 But I still come back to this whole idea and I appreciate what Joanne's saying about not going gangbusters.
  • 05:28 But nevertheless,
  • 05:30 this doesn't feel like an economy
  • 05:32 that is slowing down sufficiently.
  • 05:34 And I'm surprised it's not slowing down sufficiently given the 500 plus basis points that we've already had.
  • 05:38 Yeah.
  • 05:39 So, Joanne, if that's the case,
  • 05:41 is there something on consumers mind that would make them more constricted?
  • 05:45 I know you mentioned inflation, but last time we talked it was the debt ceiling.
  • 05:48 Is there something like that on the horizon that we can look to or point to?
  • 05:52 I I really think it's all about the labor market at this point and how confident people feel about their incomes.
  • 05:58 Like I said,
  • 05:59 they don't feel nearly as confident about their incomes as they did just a few months prior.
  • 06:04 You know, we've been in a historically strong labor market, so there's really not much room to to improve.
  • 06:11 So you know, given that consumers are
  • 06:14 are feeling less confident about their incomes, that could be something that will leave them
  • 06:19 to pull back their spending, but not necessarily
  • 06:22 in any sort of
  • 06:23 Cliff like way.