US Consumer Confidence drops to nine-month low as inflation cuts optimism

• Conference Board Consumer Confidence falls to 109.5 in November.
• Present Situation Index drops to 142.5 from 145.5, Expectations to 87.6 from 89.0.
• Equities hammered on COVID fears, Fed taper advancement, dollar is mixed.

American consumer optimism slipped to a nine-month low in November as inflation overwhelmed wages despite rising earnings from labor shortages. 

The Conference Board reported that its Consumer Confidence Index fell to 109.5 in November from a revised 111.6 in October. It was the weakest score for this more than 50-year old index since 95.2 in February. The Present Situation Index, which polls consumers on their current economic condition, slipped to 142.5 from 145.5 in September. The Expectations Index, assessing the future out to six months including inflation, sank to 87.6 in November from 89.0. 

Conference Board

The polling period for the survey ended on November 19, before news of the Omicron variant of COVID arrived from South Africa and does not include the potential economic impact, if any, from the new strain. Several nations in Europe had already imposed new mitigation measures and lockdowns from the again spreading Delta-variant. 

“Concerns about rising prices—and, to a lesser degree, the Delta variant—were the primary drivers of the slight decline in confidence,” noted the statement from Lynn Franco, Senior Director of Economic Indicators at the Conference Board accompanying the release. 

Inflation, wages and confidence

American consumers have been losing ground to inflation since April. March was the last month when annual Average Hourly Earnings (AHE) rose more than the Consumer Price Index (CPI). 

From April through October, AHE have averaged a 3.37% annual increase each month. Consumer prices in the same period have gained 5.45%. The Personal Consumption Expenditure Price Index (PCE), the core version of which is the Fed’s chosen measure, rose 4.30%. Under the first gauge, consumers have lost 2.08% in purchasing power every month, for the second the loss is 0.93%. 

Average Hourly Earnings

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Two other considerations have made this year’s CPI surge more painful to consumers than previous instances.  

First, prices have soared in a very short amount of time. Overall CPI has more than quadrupled from 1.4% in January to 6.2% in November. In the second half of 2020, CPI averaged  just 1.25%. For the majority of the previous decade consumer inflation was less than 2%. It has been a generation since Americans have seen this kind of inflation, no one is inured. 

CPI

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Second, the prices of most necessities have risen much faster than the overall inflation rate. Gasoline is the best example. For most families a car is not a luxury but it is the same category as food and shelter. The price of a gallon of regular gas has rocketed 62% in a year. Housing expenses, new and used automobiles, meat, poultry, eggs and all forms of energy have risen much more than overall CPI.

Market response

Equities were struck with a double whammy on Tuesday. Initially fears that the new South African COVID strain, dubbed Omicron, will retard or reverse the global recovery helped to drive the Dow and S&P 500  down 1.86% and 1.90% respectively. 

In an appearance before the US Senate,  Federal Reserve Chair Jerome Powell said that in light of rising inflation and a healthy economy, the $15 billion monthly reduction in the bank’s bond purchases could be increased.  

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner,” he observed. “I expect that we will discuss that at our upcoming meeting.” 

When the Fed announced the taper at the November 3 meeting only November and December were mentioned, with the statement noting that the committee “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.” The original reductions would have ended the $120 billion purchase program in June with fed funds increases beginning  sometime in the second half of the year. 

After Mr Powell’s comments Treasury futures predicted three 0.25% hikes in the fed funds rate by the December 14 meeting in 2022. 

CBOE

Treasury yields regained some of their losses of the past two sessions after Mr Powell’s discussion. The 10-year return closed at 1.473%, having been as low as 1.412%. Since the Omicron news hit the markets on Friday, the return on this benchmark bond has shed 17 basis points.

The dollar gave back some of its recent gains, with the euro closing at 1.1342, above 1.1300 for the second time in three days.

Dollar yen continued its safety reversion to the Japanese currency, finishing at 113.02, its lowest since November 9. The Swiss franc also profited from the global risk aversion ending at 0.9194, its highest in 14 sessions.  The sterling and aussie lost ground against the dollar while the kiwi was up a minor amount.