MNI INTERVIEW: Americans' Top Concern Remains Inflation-UMich

High inflation remains Americans' top concern and has kept sentiment at historically low levels despite continued expectations for a strong labor market, the head of the University of Michigan's Survey of Consumers told MNI.

"The overriding message is that consumer sentiment has deteriorated since February and this drop completely happened prior to the financial turmoil and prior to SVB," said Joanne Hsu in a phone interview Friday. "It dropped on the basis of the persistence of high prices, of inflation … consumers aren't really responding yet to the banking crisis, but it remains to be seen in the weeks ahead whether it's something that will influence them."

The University of Michigan's preliminary March reading on the overall index of consumer sentiment came in at 63.4, down 5.4 on the month. The perception of current conditions fell to 66.4, the lowest since December at 59.4, and the expected index fell 4.9 to 61.5.

"That slowdown in inflation just is not as fast as people would like and that is contributing to these deteriorating views across the board," Hsu said.

SVB IMPACT

The University of Michigan Surveys of Consumers preliminary report included 450 interviews ending March 15 and the final report to be released March 31 will include an additional 150 interviews, Hsu said.

"After SVB collapsed we did 15% of the interviews for today's preliminary release. Only a handful of them mentioned the banking collapse and the vast majority did not. We didn't see any further deterioration in sentiment after last Friday," she said, drawing comparisons to the 2008 financial crisis and the banking issues in the 1980s.

During the 2008 crisis interviewees responded to other factors in the economy, such as the housing market and unemployment, she said. "They weren't really talking about bank failures at all, and similarly in the S&L loan crisis, consumers didn't really talk about that either."

Hsu expected some pullback in consumer spending due to high prices and expensive borrowing but the bigger picture remains one in which consumers still broadly expect an economic downturn but continued labor market strength.

"Sentiment had been improving over the last few months, but it still remains historically quite low. And the reason why consumer spending has remained robust has been because of strong expectations in labor markets, strong labor markets, and strong income expectations and those things haven't changed," she said.

"Given high inflation and a strong labor market that continued all through last year and continues now, in a way there is a little bit of a disconnect in terms of how negative people feel about the economy and their continued expectations for a strong labor market," Hsu said. "But I think it's a reflection of how much pain people are experiencing because of high inflation."

ANCHORED?

The University of Michigan survey's reading of one-year inflation expectations fell 0.3 percentage point to 3.8%, the lowest reading since April 2021, and its five-year inflation outlook edged down to 2.8%.

This week, the New York Fed's measure of year-ahead inflation expectations dropped to 4.2% for the month of February and the Cleveland Fed's indirect measure of year-ahead inflation fell to 5.6%, the lowest since last spring.

Higher inflation expectations helped force the Federal Reserve to hike its policy rate 450 basis points since last March from near zero to a 4.50%-4.75% range. The Fed in recent months has slowed the pace of its rate increases.

"Given the policy uncertainties, banking issues, and escalating tensions with Russia, I would expect some volatility in inflation expectations going forward," said Hsu, a former principal economist at the Fed board's division of research and statistics. "I don't think today's data point really moves the needle on" whether inflation expectations are anchored.