U.S. consumer sentiment soured in early January, falling to the second-lowest level in a decade as Americans fretted about soaring inflation and doubted the ability of government economic policies to fix it, a survey showed on Friday.
The University of Michigan said its preliminary consumer sentiment index fell to 68.8 in the first half of this month from a final reading of 70.6 in December. Lower-income households held a more negative outlook than wealthier ones, with sentiment dropping by 9.4% among households with total incomes below $100,000, but rising by 5.7% among households above that threshold.
Economists polled by Reuters had forecast the index would decline but only to 70.0. The sharper-than-expected drop in sentiment comes as Americans face various headwinds despite an overall strong economy, with inflation topping the list of concerns amid a record level of COVID-19 cases due to the Omicron variant that could in turn prolong high prices.
COVID, Inflation to Blame
"While the Delta and omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate," Richard Curtin, the survey director, said in a statement.
"Three-quarters of consumers in early January ranked inflation, compared with unemployment, as the more serious problem facing the nation," he added.
At a current annual rate of 7.0%, inflation is near a 40-year-high, outstripping wage gains. Consumer price increases have broadened from a handful of pandemic-sensitive categories while supply chain disruptions have continued.
The current inflation readings have bolstered expectations that the Federal Reserve will start raising interest rates in March as it seeks to bring down the rate of price increases closer to its 2% flexible target. The Biden administration has said it is also prioritizing ways to help curb inflation. The survey showed confidence in government economic policies is at its lowest level since 2014.
Elsewhere in the survey, consumers raised their expectations for medium term inflation, another measure the central bank is closely monitoring to ensure that inflation expectations remain anchored.
The survey's one-year inflation expectation ticked higher to 4.9%, from 4.8%, and its five-year inflation outlook edged up to 3.1% from 2.9% in December.
The last few weeks have also seen a surge in COVID-19 cases due to the highly transmissible omicron variant, which has exacerbated labor shortages as the United States nears maximum employment.
Despite the inflation woes, economic growth is still expected to have grown last year at its fastest pace in almost four decades after falling into a brief recession in 2020 caused by the coronavirus pandemic.
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