Last week's University of Michigan consumer survey reported that sentiment fell to its lowest level since February. A key factor in the wilting confidence was inflation worries, which by some measures are ashing red in a way they have not in a generation. Massive cash savings, faster income growth, and generous tax credits will mitigate some of the price gains, even as all that liquidity makes the price problem worse. It is increasingly evident that inflation rules all facets of the economy at present. Our real personal consumption expenditures (PCE) outlook will have inflation headwinds to overcome in the second half. We presently have 8.6% PCE growth penciled in for the third quarter and 7.5%for Q4; because of inflation's toll, we now see downside risk to these numbers.

Soaring inflation is weighing on sentiment

When it comes to the post-pandemic economic reopening, a case could be made that consumer sentiment got ahead of reality. The University of Michigan's Survey of Consumer Sentiment tumbled in July to 80.8, its lowest level since February, and a sharp decline from the 85.5 level the month prior. The report was published just 90 minutes after the Commerce Department data for June showed that retail spending was more robust than most forecasters expected. What's happened to the mojo of the American consumer?

Broadly, we think that the lifting of the mask mandates was perceived by many consumers as the end of COVID and the promise of better days. The reality is proving to be a lot more complicated. Yes, life is returning to a version of normal, but surging demand against a backdrop of scarce resources and a lack of skilled labor in some industries has ushered in a degree of inflation that many younger consumers have never experienced.

Last week, we learned the CPI for June came in at 5.4% on a year-ago basis. Only one month in the past30 years has CPI inflation been higher. While it is true that the year-ago figures are coming o a low starting point, it is more than just base effects. The monthly increase of 0.9% was the third-highest in 30 years. Transitory or not, this is the highest inflation any consumer has experienced in about a generation, and it is clearly taking a toll on consumer sentiment.

To quote from the University of Michigan survey's accompanying press release, "References to high prices of homes, vehicles and household durables rose to the highest level in a half-century.” A bit of inflation can be a good catalyst to get a consumer o the fence on a potential purchase, but when prices rise this fast it can have the opposite effect as unfavorable perceptions about prices just sap the will to buy altogether. That appears to be the case in last week's report with buying intentions for autos and homes falling to their lowest levels in almost 40 years (since 1982).

A bigger burden than we appreciated

Candidly, the wilting in confidence took us off guard a bit. We are aware of the price dynamics; we have one of the highest forecasts for CPI inflation on the Street. But when it comes to the consumer, our view has been that after more than a year of being couped up indoors, households would be prepared to pay any price within reason to get out and enjoy life again. We have also maintained that the accumulated cash savings that households have accrued will help absorb some of these higher prices. We still think that is true. Note, for example, that household nances versus a year ago were unchanged in the month and that the share of consumers expecting a higher income rose to 53.3%from 52.8% previously. BUT, there was a ve-point drop in the share of households that expect their income gains to keep pace with inflation.

Still, the message that confidence can be shaken by higher prices may serve as a wake-up call that inflation poses a tangible threat to a consumer-driven post-pandemic recovery. There are some silver linings to keep in mind. Many households will begin receiving child care tax credits this month, and that may result in an upward revision to the final release for July consumer sentiment at the end of next week. Also, some of the inflation dynamics are indeed transitory; when motor vehicle assemblies pick back up, the bottom will likely fall out beneath used car prices. After making headlines just a few months ago, lumber prices are down more than 60% since May and are generally lower now than at the start of the year.

Buying attitudes show signs of sticker shock

Whether or not inflation is here to stay, it is clear in the short term that rising prices have curbed consumers' appetite for new purchases and could provide a headwind for spending. Three buying options are covered by the University of Michigan's survey: homes, vehicles, and large household appliances. All of these categories have seen buying conditions slide over the past couple of months. Vehicles and large household appliances have seen attitudes drop in ve of the seven months of this year, and views of home-buying conditions fell in six out of seven. These declines have lowered buyingattitudes for homes and vehicles to their lowest point since 1982. Price is unequivocally the culprit for declining interest in new purchases. The proportion of consumers citing "high prices" as the reason it is a bad time to buy has jumped to the highest since 1978, the series starts, for homes and vehicles and is the highest since 1980 for large household goods.

As we mentioned in our recent retail sales report, our call for a 12.9% increase in spending in Q2 is for real personal consumption expenditures, so inflation presents a risk if some of the nominal spending increases we are seeing translate to not-so-impressive real increases after price adjustments. This is the technical way in which inflation could negatively affect real spending. However, sticker shock is the second, more psychological of the two-pronged threat inflation poses to spending, and these survey responses show evidence that higher prices may have started to affect consumers. It is worth noting that this comes from survey data, and what consumers say they would do versus what they actually do is not always in sync. We have all experienced a time or two when we paid for something knowing that it was overpriced. After a year plus of being couped up, to what extent will consumers adopt that mindset? Our best sense is that they will be price takers during the initial rush this summer, but come autumn, we will likely see increased price sensitivity. We presently have 8.6% PCE growth penciled in for the third quarter and 7.5% for Q4; because of inflation's toll, we now see downside risk to these numbers.

In addition, these measures capture durables, home, and auto purchases, which are not part of the services spending that we see driving this year's boom and for which consumers may be willing to overpay since many activities were o-limits. For what we otherwise expect to be a solid year for the consumer, the key risk in our view is that price worries suggested by the survey data start to make their way into actual spending behavior.

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Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.

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