Consumers brace for an uncertain economic future

Economic uncertainty is weighing on consumers.

In its preliminary February report on consumer sentiment, the University of Michigan reported that while its index on shopper attitudes was essentially unchanged from January, and consumers have a more favorable outlook compared to a year earlier, optimism still is far below historical levels.

“Recent developments in the economy, both positive and negative, have led to mixed attitudes among consumers,” the report said. “After three consecutive months of increases, sentiment is now 6% above a year ago but still 14% below two years ago, prior to the current inflationary episode.”

Overall high prices, meanwhile, continue to influence consumers despite the recent moderation in inflation. The report noted that combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead, and that sentiment remains more than 22% below its historical average since 1978.

“Year-ahead inflation expectations rebounded to 4.2% this month, from 3.9% in January and 4.4% in December,” the report said. “Long-run inflation expectations remained at 2.9% for the third straight month and stayed within the narrow 2.9-3.1% range for 18 of the last 19 months.”

Uncertainty over short-run inflation, however, increased recently and continues to be notably elevated, the report said, indicating the potential for continued volatility in expected year-ahead inflation. “In contrast, uncertainty over long-run inflation receded in recent months, though the uncertainty stands well above averages over the last 20 years,” the report said.