The University of Michigan Consumer Sentiment Index (MCSI) ended March 2022 at 59.4, down by 0.5% from the previous decade-long low of 59.7 recorded in the first half of March, according to final results released on March 25, 2022. The main driver was rising worries about inflation, with respondents expecting inflation to be 5.4% over the next 12 months, the highest reading since November 1981.
The final value of 59.4 for March 2022 puts the MCSI 5.4% below its final reading of 62.8 in February 2022 and 30.0% under its value of 84.9 one year ago in March 2021. Respondents mentioned inflation throughout the survey, whether the questions concerned personal finances, the economic outlook, or buying conditions.
- The Michigan Consumer Sentiment Index (MCSI) sank to a new decade-long low in late March 2022.
- Rising inflation drove worries about falling living standards.
- Over the past 50 years, concerns about falling living standards were only higher during the worst recessions in this period, 1979-81 and 2008.
Reduced Living Standards Expected
Richard Curtin, the chief economist for the University of Michigan Surveys of Consumers, observed: "When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years: from March 1979 to April 1981, and from May to October 2008."
In the preliminary results for March, personal finances were expected to worsen in the year ahead by the largest proportion of respondents since the survey started in the mid-1940s. The final results show further deterioration in sentiment, with 32% of respondents now expecting to be worse off a year from now. As a result of increased expectations about rising prices and diminished expectations about income growth, half of all respondent households anticipate that their inflation-adjusted real incomes will decline in the year ahead.
The only aspect of the economy about which respondents were upbeat was the job market. They were slightly more likely to expect that the unemployment rate will fall rather than rise, by 30% versus 24%.
Inflationary Psychology Takes Hold
Curtin commented: "Strong job growth will continue to put upward pressures on wages, resulting in higher income and stronger job prospects. This strength will then act to expand consumer demand and ultimately lead to another cycle of price and wage increases. These factors represent the necessary (but not sufficient) conditions for the development of inflationary psychology as a self-fulfilling prophecy."
He continued: "Prevention of inflationary psychology is much less costly before it becomes ingrained in the economic behavior of consumers and firms. Confidence that economic policies will resolve the problem is essential. Unfortunately, half of all consumers unfavorably assessed current policies, more than three times the 16% who rated them favorably."
In the final survey for February, many respondents indicated that aggressive actions are necessary right now "to avoid the potential establishment of an inflationary psychology that acts to form a self-fulfilling prophecy." However, many worried that the Federal Reserve had missed opportunities to nip inflation in the bud at its earliest stages.
The preliminary survey for January 2022 noted that respondents' confidence in government economic policies had dipped to its lowest level since 2014. This aspect of consumer sentiment has continued to erode in subsequent surveys.
Related Indexes Continue Downtrend
The MCSI final report for March 2022 also included Michigan's Current Economic Conditions Index and Index of Consumer Expectations. In the final March 2022 report, the Current Economic Conditions Index was down by 1.5% from February 2022 and down by 27.7% from March 2021. The Index of Consumer Expectations declined by 8.6% from February and by 31.9% from the previous March. All these represented slight deteriorations from the preliminary readings in early March.