Index of Consumer Sentiment in May Drops -6.2% Month-Over-Month, Rises 14.5% Year-Over-Year

The University of Michigan released today (5-14-21) its preliminary Index of Consumer Sentiment (ICS) for May 2021. Month-over-month the ICS declined -6.2% from 88.3 in April to 82.8 in May. When compared to May 2020, the ICS increased 14.5% from May 2020 reading of 72.3. Current Economic Conditions (-6.6%) and the Index of Consumer Expectations (-6.2%) were also lower in May but were up year-over-year 10.3% and 17.8% respectively. In remarks prepared for the release of ICS, Richard Curtin, Survey of Consumers Chief Economist said, Consumer confidence in early May tumbled due to higher inflation — the highest expected year-ahead inflation rate as well as the highest long term inflation rate in the past decade. Rising inflation also meant that real income expectations were the weakest in five years. The average of net price mentions for buying conditions for homes, vehicles, and household durables were more negative than any time since the end of the last inflationary era in 1980 (see the chart). Importantly, consumer spending will still advance despite higher prices due to pent-up demand and record saving balances. This combination of persistent demand in the face of rising prices creates the potential for an inflationary psychology, fostering buy-in-advance rationales and cost-of-living increases in wages. At present, these rationales remain relatively uncommon, and the power of corrective economic policies is now relatively potent. Policy commitments to establish full employment while allowing inflation to meaningfully rise have never been attempted with the additional micro goals of equity and fairness across population subgroups. Shifting policy language and even minor rate increases could douse inflationary psychology. Indeed, such a policy would be consistent with consumer expectations since two-thirds expect a rate hike in the year ahead. It should be no surprise that consumers anticipate a booming economy over the next year or so, including rapid job gains as well as increases in the inflation rate and interest rates. Indeed, consumers think these economic prospects are the natural result of stimulating an economic boom from last year’s shutdown.