Consumer sentiment dropped in November amid fears about rising inflation and high interest rates. A recent survey has shown that consumers drastically slowed down spending on goods.
US consumer sentiment drops
According to a preliminary reading by the University of Michigan, the index on consumer sentiment dropped from 59.9 in October to 54.7 in November. The 8.7% drop erased around 50% of gains since the index dropped to a record low in June. The drastic drop at the time came amid a rise in gas prices.
A poll conducted by Reuters collecting economists’ views has predicted consumer sentiment to be at 59.5. The survey showed that the expectations for inflation were at 5.1% in November, higher than 5% in October. Moreover, the five-year inflation expectations jumped to 3% in November from 2.9% in October.
This data hints that inflation levels could remain stubbornly high despite easing price pressures. The CPI data released on Thursday showed that consumer prices in October had increased at a lower-than-expected rate. This dropped inflation to 7.7%, the lowest level since January.
High interest rates drop consumer spending
While speaking to Reuters, the chief economist at LPL Financial in Charlotte, Jeffrey Roach, said that the Federal Reserve had hinted at plans to slow down the rate at which they were raising interest rates. The recent CPI report makes this more likely to happen. On the other hand, the Fed could continue with aggressive monetary tightening policies if inflation expectations reach yearly highs.
The drastic drop in consumer sentiment was widespread. Buying durable manufactured goods dropped 21% because of high prices and high interest rates. Consumers have also shifted their spending from goods to services, but some economists do not believe that consumer spending will collapse.
The consumer sentiment index by the University of Michigan is below the pre-pandemic levels. On the other hand, the consumer confidence index by the Conference Board is higher than the early pandemic lows.
The correlation between the changing monthly consumer sentiment and real consumer spending remains low. According to a senior economist at Moody’s Analytics, Scott Hoyt, it could continue with the same trend in the short run. Hoyt added that consumers had the excess saving, with recent data showing they wanted to access resources to stabilize real spending. Consumer sentiment and spending could rise if the Fed eased interest rate hikes.