Consumer sentiment is falling, increasing the risk of runaway inflation

U.S. consumers’ reactions to recent inflation increase the risk of escalating inflation in the coming year, according to the University of Michigan’s chief economist’s survey of consumer sentiment.

“The declining resistance to price increases among buyers will be accompanied by less resistance among sellers to price increases that will be justified by higher materials and labor costs. These reactions promote accelerating inflation until a turning point is reached when consumer incomes can no longer keep pace with escalating inflation. ” said Richard Curtin Friday.

The University of Michigan’s consumer sentiment index fell in October to a reading of 71.7 from last month’s 72.8. A year ago, the consumer mood was 81.8. Both the current component and the expectation component decreased during the month.

“The positive effect of higher income expectations and the declining coronavirus has been offset by higher inflation rates and declining confidence in government economic policy,” Curtin said.

Consumer expectations for inflation rose to the highest level since 2008. Uncertainty about the inflation rate for the coming year rose to the highest level in forty years. Uncertainty about long-term inflation rose to its highest level in a decade.

“Note that this was the first major increase in inflation uncertainty recorded outside of a recession,” Curtin said.

One in five households mentioned declining living standards due to inflation. This concern was concentrated among older and poorer households.

Curtin said that historically, when consumer recognition of inflation triggers an escalation in price increases, even a recession does not align expectations.

“In the previous inflationary era, one recession was insufficient to adjust expectations; it required a series of boom-bust cycles until Fed Volcker finally defeated inflation by raising interest rates to record levels,” Curtin said.