Consumer confidence in economy dips slightly over worries inflation will outpace wage gains

Photo credit: Beyond Neon via Flickr

By Dan Calabrese

Context is key here. Late last year, consumer confidence hit a record high of 101.4 in the aftermath of Trump’s election and the expectation of the tax cut/reform that ultimately happened. Since then, we’ve seen record low unemployment and wage increases – which you’d expect in a tight labor market when employers are dying to find qualified people to fill open jobs.

Usually when things are growing like this, some economists start fretting about the economy “overheating” and inflation being the result, and the media tend to run to the economists who are engaged in said fretting.

So sure, you’ll see the euphoria cool a bit, since some people can never feel confident about anything for long. The overall level of confidence remains high, but some people aren’t sure rocket-propelled economic growth will benefit them personally:

May’s survey showed consumers anticipate smaller income growth than they had a month or year ago, but they do expect the unemployment rate to remain around 3.9%, the lowest level since 2000. Meanwhile, sentiment about current economic conditions has declined since March, but economic expectations for the future ticked up in May.

“There appears to be some emerging skepticism about whether or not wage gains will actually increase enough to offset expected inflationary pressures and rising interest rates, despite an expectation of continued job market strength,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said.

Indeed, near-term inflation expectations rose. Consumers now expect 2.8% price growth in the next year compared with the 2.6% price growth they expected when polled in May 2017. Their expectations for longer-term inflation have remained steady at 2.5% for the past five months.

The personal-consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, was up 2% from a year earlier in March, the first time in more than a year it met the Fed’s target. At their meeting earlier this month, Fed officials signaled they were likely to raise their benchmark short-term interest rate at their June meeting.

Remember, when interest rates rise, savers are rewarded. Most of the attention paid to interest rates is focused on the cost to borrowers for their debt service. But the money banks lend people comes from depositors, and depositors benefit when interest rates rise. Interest rates have been kept artificially low for years because the fed thought that would help mitigate the impact of slow economic growth that persisted during the Obama years. They are long overdue for a boost, and that is not only good for savers but it should help to moderate some of the nation’s borrowing tendencies, since it will cause the cost of borrowing to be more reflective of what market conditions suggest it should be.

When you’re making it too easy for people to take on debt by keeping the cost of debt service artificially low, what you’ll get is an excess of debt. That is not a good thing, whether the borrowing is being done by individuals or by Congress.

As for inflation, we’ll see if that really takes off the way some of the biggest worrywarts think it will. This is a common freakout whenever the economy starts growing faster, since prices are driven by supply and demand and greater consumer demand usually accompanies growth. But keep in mind that the price of goods rises to help manage supply as well. When supply is lessened, raising the price of a good helps prevent shortages, and it’s usually followed by price reductions when the item is once again available in greater abundance. If the price of something you want to buy is inflated by this phenomenon, you could always wait to buy it or buy it in smaller quantities until you see if the price moderates again.

But here’s the bottom line: More buying power and more demand are both signs of growing prosperity. Some price increases to go with that prosperity is not to be feared. It’s part of what happens, because people have the buying power to absorb the higher prices. If you’re feeling better about the economy, good, you should be. And if you’re worried about inflation, relax. Unless it’s driven by a devaluation of the currency, it’s just another market dynamic, and it’s your own greater buying power that’s likely causing it.

Dan writes Christian spiritual warfare novels and does all kinds of other weird things too. Follow all his activity by liking him on Facebook!