Inflation Dents Consumer Sentiment

Insights | Inflation Dents Consumer Sentiment

Author: David I. Templeton, CFA, Principal and Portfolio Manager

This past week saw inflation reported at a very hot level, up .9% month over month and 6.2% year over year. If this monthly rate is annualized, the Consumer Price Index (CPI) is up over 10%. An alternative measure of inflation is personal consumption expenditures (PCE) that reflects the prices of goods and services purchased by consumers and it is up 4.4% YoY. The PCE Index below is a month behind the reported CPI and Core PCE excludes food and energy, but all the measures above the Fed's 2% inflation target.

consumer price index, October 2021 and PCE, September 2021

Several categories of inflation have seen outsized increases and have a direct impact on consumers. On a YoY basis gasoline prices are up 49.6%, used car & trucks up 26.4%, meat up 11.9% and new vehicles up 9.8%.

inflation October 2021: cars, meat gasoline

The jump in inflation is resulting in weaker consumer sentiment. The University of Michigan Consumer Sentiment Survey this week declined to its lowest level in ten years. Cited in the report was escalating inflation and a "growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation." The report noted that half of all families anticipated reduced real income in the coming year.

University of Michigan Sentiment Survey. November 2021

Several of the previously noted categories seeing inflationary spikes, gasoline and food categories, can become a headwind for overall consumer spending as it harms sentiment. With consumer spending accounting for 70% of economic growth, lower GDP growth in the future could become a reality. The first reading on third quarter GDP of 2% may be a sign of subpar growth ahead.

GDP third quarter 2021. Advanced reading

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