University of Michigan’s Final Consumer Sentiment Index Declines for March 2022

The University of Michigan today (Friday 3-25-22) released its final Consumer Sentiment Index (CSI) for March. The CSI declined to a reading of 59.4 in March, down from 62.8 in February. This is a month-over-month decrease of -5.4% and down -30.0% year-over-year (84.9 in March 2021).

The Current Economic Conditions dropped to a reading of 67.2 in March, down from 68.2 in February. This is a month-over-month decline of -1.5% and down -27.7% year-over-year (93.0 in March 2021).

Finally, the Index of Consumer Expectations fell to a reading of 54.3 in March, down from 59.4% in February. This is a month-over-month decline of -8.6%, and down -31.9% year-over-year (79.7 in March 2021).

In remarks and analysis prepared to accompany the release of the preliminary February 2022 CSI, Dr. Richard Curtain (Ph.D., Economics), Director of Surveys for the University of Michigan said:

“Consumer Sentiment remained largely unchanged in late March at the same diminished level recorded at mid-month. Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4%, the highest since November 1981. Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions.

When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years: from March 1979 to April 1981, and from May to October 2008. Moreover, 32% of all consumers expected their overall financial position to worsen in the year ahead, the highest recorded level since the surveys started in the mid-1940s. The combination of rising prices and less positive income expectations meant that half of all households anticipated declines in inflation-adjusted incomes in the year ahead.

The sole area of the economy about which consumers were still optimistic was the strong job market. Consumers anticipated in March that during the year ahead it was more likely that the unemployment rate would post further declines than increases (30% versus 24%).

Strong job growth will continue to put upward pressures on wages, resulting in higher income and stronger job prospects. This strength will then act to expand consumer demand and ultimately lead to another cycle of price and wage increases. These factors represent the necessary (but not sufficient) conditions for the development of inflationary psychology as a self-fulfilling prophecy.

Prevention of inflationary psychology is much less costly before it becomes ingrained in the economic behavior of consumers and firms. Confidence that economic policies will resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16% who rated them favorably. Making the situation even more difficult, policy makers need to take account of two unusual sources of economic uncertainty, one rather minor (the new covid variant), and a major source of continued economic disruption (the Russian invasion of Ukraine).”

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