Consumer sentiment remained virtually unchanged from its mid month
reading, gaining just 0.3 Index points, and just 0.1 Index points above
the average in the past two months, and only 0.1 Index points below the
April 2020 low. The positive impact of higher income expectations and
the receding coronavirus has been offset by higher rates of inflation
and falling confidence in government economic policies. Consumers not
only anticipated the highest year-ahead inflation rate since 2008 in the
October survey, consumers also expressed greater uncertainty about the
year-ahead inflation rate than anytime in nearly forty years (see the
chart). Note that this was the first major spike in inflation
uncertainty recorded outside of a recession. Even uncertainty about the
long-term inflation rate was the highest in more than a decade.
Declining living standards due to inflation were spontaneously mentioned
by one-of-every five households, concentrated among older and poorer
households.
The patterns of consumers' reactions to recent rises in inflation represent the preconditions that can promote an escalating inflation rate during the year ahead. Consumers' recognition of high and rising prices is near universal, so too is their desire to reestablish spending for a more traditional holiday season. People understand that the origin of inflation has been in the upheavals in supply lines and labor markets. The acceptance of higher prices was caused by swollen savings due to the record pandemic cash incentives as well as by Biden's new social support programs. The declining resistance to price hikes among buyers will be joined by less resistance among sellers to hiking prices that will be justified by higher materials and labor costs. These reactions promote an accelerating inflation rate until a tipping point is reached when consumers' incomes can no longer keep pace with escalating inflation. In the past inflationary era, one recession was insufficient to realign expectations; it required a series of boom-bust cycles, until the Fed's Volcker finally defeated inflation by raising interest rates to record levels.
The patterns of consumers' reactions to recent rises in inflation represent the preconditions that can promote an escalating inflation rate during the year ahead. Consumers' recognition of high and rising prices is near universal, so too is their desire to reestablish spending for a more traditional holiday season. People understand that the origin of inflation has been in the upheavals in supply lines and labor markets. The acceptance of higher prices was caused by swollen savings due to the record pandemic cash incentives as well as by Biden's new social support programs. The declining resistance to price hikes among buyers will be joined by less resistance among sellers to hiking prices that will be justified by higher materials and labor costs. These reactions promote an accelerating inflation rate until a tipping point is reached when consumers' incomes can no longer keep pace with escalating inflation. In the past inflationary era, one recession was insufficient to realign expectations; it required a series of boom-bust cycles, until the Fed's Volcker finally defeated inflation by raising interest rates to record levels.
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