US consumers were feeling less optimistic about the economy and increasingly worried about an accelerated rise prices, dimming their outlook for the recovery.
The University of Michigan’s consumer sentiment index, which fell to 80.8 from a reading of 85.5 in the previous month, took the shine off data released earlier on Friday showing a rebound in retail sales during June, propelled by strong demand at electronics stores, apparel outlets and restaurants.
“Rather than job creation, halting and reversing an accelerating inflation rate has now become a top concern,” said Richard Curtin, chief economist for the university’s surveys of consumers.
Shoppers are facing “sticker shock” on a range of goods from chicken to used cars. The consumer price index jumped 5.4 per cent in June from a year ago, a 13-year high, following a 5 per cent rise the previous month. Wholesale prices have also climbed, portending an increase in costs for consumers. The producer price index was up 7.3 per cent last month, the biggest yearly gain since at least 2010.
Federal Reserve officials have stood by forecasts that surging inflation will be shortlived, but some lawmakers have argued that the central bank and the Biden administration are underestimating the risks that inflation poses to the economic recovery.
During a hearing in Congress this week, Fed chair Jay Powell pushed back against suggestions that the central bank has been complacent, assuring lawmakers that it would be ready to respond if inflation outruns its expectations.
“I know people are very worried about inflation,” Powell said. “We hear that loud and clear from everybody . . . it is really going through the economy and through every business.”
The consumer sentiment survey found a record level of complaints related to rising prices on homes, vehicles and durable goods, fuelling the index’s drop to its lowest level since late February.
Respondents estimated a 4.8 per cent rate of inflation in the year ahead, the highest outlook since August 2008, compared with 4.2 per cent in June.
“Inflation has put added pressure on living standards, especially on lower and middle income households, and caused postponement of large discretionary purchases, especially among upper income households,” Curtin said.
Economists are watching sales trends closely to determine if consumers are rushing to buy goods now to get ahead of future price increases or instead using their cash to build up savings or pay down debt.
Data released by the US Census Bureau on Friday showed a 0.6 per cent increase in retail sales from the month before, bucking expectations for a 0.4 per cent drop, according to a Reuters poll of economists.
Retail spending had decelerated in recent months after a burst of shopping activity earlier this year. In May, sales fell 1.7 per cent as the boost from federal stimulus cheques waned.
Paul Ashworth, chief US economist at Capital Economics, warned that inflation may have “masked” weakness in actual sales activity.
Still, consumers have shown a willingness to spend, with strong demand for goods, while many have been booking hotel rooms and tickets for sporting events now that Covid-19 restrictions have lifted in almost every corner of the US. Spending on services, such as travel accommodation, is not captured by retail sales data.
“Strong June US retail sales suggests no let-up in the appetite of consumers to spend on physical things despite the economic reopening providing a broadening range of options, such as leisure and hospitality,” said James Knightley, ING’s chief international economist.
Last month, the National Retail Federation raised its forecast for sales this year, predicting annual growth of 10.5 per cent to 13.5 per cent over 2020. It previously anticipated a 6.5 per cent increase.
The June retail sales report showed that food services including restaurants and bars continued to recover with a month-to-month gain of 2.3 per cent. Electronics and appliances, groceries, petrol stations, department stores and drug stores also generated stronger sales. Sales at car dealers, furniture stores and home and garden centres were down.
Excluding fuel, retail sales rose 0.4 per cent from May, compared with a 1.9 per cent decline in the previous month.