Rising wages spark both optimism and pessimism on inflation

Consumers expressed much more positive views in April, up 9.8% from March, according to consumer surveys from the University of Michigan.

Most of the push was concentrated in expectations, with gains of 21.6% in the economic outlook for the year ahead and an 18.3% jump in personal financial expectations, the economist said. UM Richard Curtin, Director of Investigations.

The cause was a sharp drop in expectations for gasoline prices, falling to just 0.4 cents from last month’s 49.6. Lower gas prices could be reversed by ongoing developments in Ukraine, he said. The overall impact on sentiment trends, however, has been quite small: with the exception of the last two months, the sentiment index in April was still lower than in all previous months of the past decade.

Curtin said the drop in overall GDP in Q1 came as no surprise to consumers. However, consumers continued to increase their spending modestly by 2.7% due to a strong labor market and rising wages.

“The pandemic has created a sense of uncertainty, which has only increased due to rising inflation and the growing consequences of the war in Ukraine. Just when supportive government policies are needed, consumers have lost faith in economic policies,” he said. “Fiscal actions will be increasingly hampered by partisanship as the congressional elections approach. Monetary policy aimed at tempering the strength of the labor market and reducing wage gains are the only factors supporting optimism.

“A soft landing will be difficult to achieve given the heightened uncertainties, which raises the prospects of a temporary Fed halt or reversal. The likelihood of hitting a tipping point will depend on whether a market holds strong labor and strong wage gains.The cost of this renewed strength could be an acceleration of the wage-price spiral.

A dynamic labor market and rising wages

The continued strength of the labor market and rising wages remain the only source of economic optimism. Consumers were more likely to anticipate small further declines in the national unemployment rate despite its current low of 3.6%.

Expected wage gains have remained strong, with expected gains for all households averaging 2.6% – the last time a larger increase was recorded was March 2007. In addition, an annual income gain of 5.3% was expected by those under 45, which was the highest expected wage gain since May 1990.

The growing dominance of inflation

The outlook for consumers’ personal finances improved in April, reversing the negative trends expected last month. Importantly, the gains were broadly shared across income and age groups, largely due to the idea that gasoline prices had peaked, Curtin said.

Inflation was seen as the major problem facing the country and was causing an erosion of household living standards. Inflation was cited as the main cause of the decline in living standards, mentioned by 36% of all households. Although the expected rate of inflation was unchanged from last month, high prices meant consumers were faced with a tough choice of normally purchased items to dispose of, Curtin said.

Consumer Confidence Index

The Consumer Confidence Index rose to 65.2 in April from 59.4 in March, but well below last April’s 88.3 – so far President Biden’s peak. The Expectations Index rose to 62.5 in April from 54.3 in March, and the Current Conditions Index rose more modestly, to 69.4 in April from 67.2 in March. Compared to a year ago, both indices are down about 25% in value.

About polls

The consumer surveys are a rotating panel survey based on a nationally representative sample that gives each household in the coterminous United States an equal probability of being selected. Interviews take place throughout the month by telephone. The minimum monthly change required for significance at the 95% level of the sentiment index is 4.8 points; for the current index and expectations, the minimum is 6 points.