32 BARRON’S November 22, 2021
THE ECONOMY
Goldman Sachs says recent declines in consumer
sentiment would implya0.4%dragon fourth-
quarter annualized consumption growth.
Have Consumers’
Inflation Fears Sped
Spending? It Seems So
I
nflation is making consumers
miserable. To judge from retail
sales, that might not matter—for
now. But lofty inflation expecta-
tions are a warning worth heed-
ing, potentially signaling slower
economic growth ahead.
When the Commerce Department
reported October sales across retail
and food-services stores, the results far
exceeded expectations, with total sales
rising at the fastest pace since March.
On the heels of a surprisingly sluggish
third-quarter gross-domestic-product
report that showed the slowest pace of
growth since the recovery began, solid
retail sales reminded investors that
U.S. consumers are flush, shopping,
and still powering economic activity.
You wouldn’t know it, though, to
look at confidence surveys. Take the
latest report from the University of
Michigan. Consumer sentiment fell
in early November to its lowest level
in a decade, says Richard Curtin, the
survey’s director.
The details are even drearier: A
quarter of U.S. households expect
their financial situation to deteriorate,
the biggest share since 2008; half of
respondents say the national economy
has recently weakened and will con-
tinue to do so in the year ahead; and
nearly six in 10 consumers think bad
times financially will persist in the
next five years. Economists at Gold-
man Sachs say the recent declines
in the Michigan gauge would imply a
0.4% drag on fourth-quarter annual-
ized consumption growth, which ac-
counts for about two-thirds of GDP.
What consumers say and what they
do don’t always jibe. Some economists
shun sentiment surveys, viewing them
as useless when spending data are
readily available each month. After all,
the golden rule of behavioral economics
is to observe what people pay, not what
they say, economist Dan Geller notes.
But it isn’t that simple. Since retail
sales are reported in nominal terms,
meaning the data aren’t inflation-
adjusted, it is worth considering the
corresponding increase in the con-
sumer price index. That’s a back-of-
the-envelope way to inflation-adjust
the sales figure, says Citi economist
Veronica Clark. Applying the CPI
roughly suggests that higher prices
represented about half of the October
increase in sales, with actual sales
volume representing the balance.
Higher prices aren’t altogether bad.
Companies are successfully passing
on climbing wages, rising material
prices, and surging shipping costs,
protecting profit margins and then
padding them some more. Anxious
about supply-chain challenges, retail-
ers began pushing out a wave of holi-
day deals in October, a report from
software companyAdobeshows. But
those deals have been skimpy. Prices
rose in 12 of 18 categories last month;
they almost always fell, on average,
during the same period from 2015 to
Expectations for record-high corpo-
rate profit margins of 13.1% this year,
13.2% next year, and 13.8% in 2023 are
proof that cost pressures aren’t squeez-
ing margins, says Ed Yardeni, presi-
dent of Yardeni Research. Retailers’
stocks are benefiting. TheSPDR S&P
Retailexchange-traded fund (ticker:
XRT) is up 10% this month and 61%
this year, far outpacing respective gains
of 2% and 25% in the S&P 500 index.
Consumers might not be happy about
it, but they are paying up.
At least for now. “I wouldn’t look at
it and say, ‘All our concerns are gone,’ ”
notes Citi’s Clark of the upside retail
sales report. “Part of it is that prices
are pulling forward holiday shopping,”
she adds.
While solid October sales augur
well for fourth-quarter GDP, Clark
cautions of possible payback in No-
vember and December, with sales
in those months potentially lower
because consumers shopped earlier.
Therein lies one reason not to dis-
card survey data that are so glaringly
conflicting with reality, or at least the
reality before it is adjusted for infla-
tion. Curtin at the University of Michi-
gan attributes falling confidence al-
most entirely to rising prices. While
respondents widely reported nominal
income gains, half of all families fore-
see reduced real incomes next year,
and a quarter say they already feel
inflation is reducing their standard
of living, he says.
Consumers speeding up purchases
in anticipation of higher prices is the
very dynamic central bankers fear. If
real-world prices shape inflation expec-
tations that wind up determining actual
inflation, perception becomes reality.
In fact, the report’s measure of inflation
expectations over the next year edged
up to 4.9%, the highest since 2008, with
71% of all consumers surveyed predict-
ing higher prices in the year ahead.
It’s important to note that long-
term inflation expectations within the
latest Michigan survey held at 2.9%—
elevated, but not alarmingly so. One
reading: Consumers buy the narrative
that inflation is mostly transitory,
believing that rates of prices increase
will slow after next year. But not
everyone is sold.
Tom Porcelli, chief U.S. economist
at RBC Capital Markets, notes that the
share of people expecting inflation to
be around the Federal Reserve’s 2%
target over the next year has fallen
sharply, and is near the lowest level
observed over the past few decades.
The number of people predicting infla-
tion of 3% or higher has shot up dra-
matically, driven by the share of people
anticipating inflation of 15% or more.
Few things are seeing prices rise at
that pace. “But the simple fact that
people perceive it that way should
be enough to scare the Fed,” Porcelli
says, adding that inflation fear is
widespread, with the entire income
distribution on the same page.
The question isn’t whether con-
sumers feel inflation and expect it to
run higher over the next year. It’s
whether consumers are spending
now because of those rising inflation
expectations at the expense of future
Sources: Federal Reserve Bank of St. Louis; University of Michigan spending—or in spite of them.B
Unhappy Customers
Inflation Is weighing on sentiment but not spending–yet.
1-Year Inflation Expectations
5.5%5.04.54.03.53.02.52.01.5(^2007201020152020)
By Lisa Beilfuss