Consumer sentiment rises more than expected in July

Consumer sentiment edged upward at the end of July, although it still posted a monthly decline of 5.0%. 

The largest monthly declines remained concentrated in the outlook for the national economy and complaints about high prices for homes, vehicles, and household durables. While most consumers still expect inflation to be transitory, there is growing evidence that an inflation storm is likely to develop on the not too distant horizon. 

The improved finances of consumers have greatly reduced consumers' resistance to price increases. While firms have reacted to their own supply and labor shortages with a greater readiness to increase prices as well as wages. Consumers and firms currently justify their actions as temporary adjustments due to the pandemic. However justified, such changes act to generate an upward spiral in prices and wages. 

Moreover, the fiscal and monetary policies already in place, and the likely increases and continued accommodation now contemplated, will only increase the willingness of consumers and firms to act in ways that accelerate the upward spiral in prices and wages. This reaction by consumers is unique, and quite different from the inflationary psychology of the 1970s. In that earlier era, the booms were driven by the willingness of consumers to advance their purchases in an attempt to avoid future price hikes, now the coming boom will be due to income and job gains that make price increases easier to manage, with the gains generated by federal transfers and physical and human infrastructure programs. 

The beneficial reduction in income inequality will shift more money to those who have higher propensities to spend, and thus energize demand. The booms will end in the same way as usual: rising prices will eventually outdistance wage gains, lowering living standards, and cause an economy-wide retrenchment in spending.