Consumer sentiment falling in the face of rising inflation

Summary

Against a backdrop of worsening inflation, consumers now expect their personal finances to deteriorate in the year ahead by the largest share since the survey started in the mid-1940s. That is a top takeaway from the preliminary University of Michigan survey of consumer sentiment for March. Headline consumer sentiment fell to 59.7, its lowest since 2011.

Pain at the Pump + RTO = Less Money for Other Spending

The accompanying text cut right to the chase : "The greatest source of uncertainty is undoubtedly inflation and the potential impact of the Russian invasion of Ukraine." Roughly one in four respondents spontaneously mention the war in eastern Europe during March's preliminary survey.

Inflation expectations rose to a four decade high. Coming as it did on the day after we learned that CPI inflation rose to a fresh 40-year high as well, the takeaway is clear: inflation is the top threat to consumer spending. As our latest forecast update makes clear: the Russia-Ukraine war makes that problem worse.

One of the most visible and regularly purchased products is gasoline. With gasoline prices at record highs, consumers expect additional increase of 50 cents in gas prices over the next year. Last month, the expected gain was just 15 cents. The fact that gas prices are soaring comes at a particularly bad moment as many workers are reacclimating to the return-to-office (RTO). With many consumers having spent close to nothing on a commute for the past two years, the combination of RTO & higher prices at the pump have scope to impact wallet share — the leftover funds for discretionary spending — particularly for lower income households.

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