Consumers are feeling more optimistic, and it’s probably because they are seeing price rises beginning to moderate and prices decline in some areas.
The University of Michigan reported in its preliminary sentiment survey for December that consumer sentiment rose 4 percent above November, recovering most of the losses from November but remaining low from a historical perspective.
“Gains in the sentiment index were seen across multiple demographic groups, with particularly large increases for higher-income families and those with larger stock holdings, supported by recent rises in financial markets…Throughout the survey, concerns over high prices—which remain high relative to just prior to this current inflationary episode—have eased modestly.”
Why in are consumers feeling better? One reason may be gas prices are falling. The national average retail price for a gallon of gas is now $3.33, down $1.69 from June, according to White House data, and now lower than pre-Ukraine war levels.
And a key index of wholesale inflation, the Producer Price Index (PPI), also softened. It rose 0.3 percent in November. The core producer price index, which excludes volatile food, energy and trade prices, also rose 0.3percent in November, up from a 0.2 percent gain in the prior month, but slowed to 7.4 percent gain over the past 12 months from 8.1 percent in the prior month.
Even more importantly for economic growth, the index is down from the peak of 11.7 percent in March when bottlenecks restricted the supply of raw materials that comprise the wholesale price index.
Its reading on future inflation expectations is also looked at by the Fed in an attempt to predict future consumer spending.
Year-ahead inflation expectations improved considerably but remained relatively high, falling from 4.9 percent to 4.6 percent in December, the lowest reading in 15 he months but still well above 2 years ago.
“Declines in short-run inflation expectations were visible across the distribution of age, income, education, as well as political party identification. At 3.0 percent, long run inflation expectations has stayed within the narrow (albeit elevated) 2.9-3.1 percent range for 16 of the last 17 months.”
I’ve highlighted the longer term expectations because it is this statistic that is supplying ammunition for the inflation doves who say the Fed should now pause in their rate hikes to see if their actions to date will induce consumers to spend less, thus pushing down inflation even further.
We are already seeing its effect on the housing industry. I reported recently that the National Association of Realtors® (NAR) reported median house prices were up just 6.6 percent year-over-year (YoY) in October. This is down from the peak growth rate of 25.2 percent YoY in May 2021.
And, Case-Shiller reported that the National Index was up 13.0 percent YoY in August, down from a YoY peak of 20.8% percent in March 2022.
Any moderation in inflation is good news for housing, of course. Calculated Risk’s Bill McBride just highlighted a report from the National Association of Realtors (see above graph) that for-sale housing inventories are up 53 percent in one year.
This is perhaps the best reason to believe that as inflation continues to decline, it will revive the housing market as well as bolster consumer confidence.
Harlan Green © 2021
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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