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Lowest since November 2011 on rising inflation, low confidence in government

The University of Michigan Consumer Sentiment Index (MCSI) ended January 2022 down by 4.8% from its level in December 2021, according to final results released on Jan. 28, 2022. This also reflects rapidly deteriorating confidence over the past two weeks. The preliminary reading issued on Jan. 14, 2022, had shown a 2.5% dip in the MCSI since December. The MCSI now stands at its lowest level since November 2011.

At a final value of 67.2 for January 2022, the MCSI is 4.8% below its reading of 70.6 in December 2021 and 14.9% under its value of 79.0 one year ago, in January 2021. “The current slump was due to two sharp declines separated by a brief interlude of rising optimism,” the report observes

KEY TAKEAWAYS

  • The Michigan Consumer Sentiment Index (MCSI) fell again in late January 2022.
  • The reading was the lowest since November 2011.
  • The top concern of respondents remains rising inflation and falling real incomes.
  • Confidence in government policies is at its lowest since 2014.

Sharp Turns in Consumer Sentiment

The arrival of the COVID-19 pandemic and the attendant shutdown of the economy sparked a 28.9% plunge in optimism from February to April 2020. Consumer sentiment then began a strong recovery in late 2020, posting a 23.0% increase by April 2021. Then came a reversal during the past nine months, with the MCSI dropping by 23.9%. The delta and omicron variants of COVID-19 were the major factors behind the recent drop in the MCSI, but other factors, some of which were initially triggered by COVID-19, have become independent forces affecting consumer sentiment.

Top Concern Remains Inflation

The primary concern for respondents to the MCSI survey is rising inflation and falling real incomes. Additional consumers may be viewing Federal Reserve Board (FRB) policy moves to slow the economy as part of the problem rather than as a part of the solution.

While supply chain issues and essential workers have led to the initial increases in prices and wages, the wage-price spiral that appears to have emerged subsequently no longer seems to be tied to those initial triggering conditions. Household spending has been supported by “extraordinary” increases in the prices of homes and stocks that are likely to turn negative in the year ahead.

Confidence in Government Lowest Since 2014

Overall confidence in government economic policies is at its lowest level since 2014, and growing geopolitical risks are adding to consumer pessimism. Consumers may overreact to small shifts in government policy, including Federal Reserve policy, especially given the continuing uncertainties related to COVID-19 and other rising geopolitical risks. “Clear policy communication is insufficient if it does not also advance consumers’ understanding of the economic tradeoffs involved and their plans to actively alleviate any undue harm,” the report cautions.

Related Indexes Are Down

The MCSI final report for January 2022 also included Michigan’s Current Economic Conditions Index and Index of Consumer Expectations, both of which recorded further declines from the preliminary reading. The Current Economic Conditions Index was down by 3.0% from December 2021 and down by 17.0% from January 2021. The Index of Consumer Expectation declined by 6.1% from December and by 13.4% from the previous January.

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The post “Consumer Sentiment Falls Again in January 2022” first appeared on January 28th, 2022 on Investopedia.com

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