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Rampant inflation has become a gnawing problem for millions of consumers over the past year, and most Americans expect prices to climb higher in the year ahead.
Nearly two-thirds of adults (65%) believe the inflation rate will rise in the future, according to the latest Forbes Advisor-Ipsos Consumer Confidence Weekly Tracker, compared to 27% who expect it to remain unchanged and only 8% predicting a decline.
“Inflation is on the rise and several factors, such as rental costs, auto purchases, food prices, wages, consumer goods and raw materials, have contributed,” says Tom Stringfellow , chief investment strategist at Argent Trust.
Large-scale price increases took root even before Russia invaded Ukraine a month ago, putting even more pressure on oil markets and pushing the average price of a gallon of gasoline at the highest nominal level in history (not adjusted for inflation).
In mid-March, the Federal Reserve raised interest rates for the first time since 2008, shifting to a more hawkish policy to control inflation. Fed officials say rate increases are likely to continue through 2022 and possibly into 2023.
Consumers are not particularly optimistic about inflation. Although wages have risen in the United States, they have not kept up with price increases, and supply shortages continue to plague buyers and businesses.
Survey reveals rapid changes in Americans’ money worries
Other results from the Forbes Advisor-Ipsos survey further illustrate the money worries plaguing the American consumer.
For example, 58% of respondents believe their monthly bills and regular expenses will increase, up 8 percentage points from the previous survey on January 13. Meanwhile, just 18% believe their household income will increase over the next year, a drop of five percentage points from the previous survey.
Actions taken by the Fed to tighten monetary policy are driving up mortgage rates, and this is starting to show in survey data.
For much of the pandemic, 30-year fixed-rate mortgage rates were almost comically low. They reached 2.67% at the end of 2020, almost 2 percentage points lower than two years earlier. Homeowners took advantage and refinanced their mortgages to record highs.
Those days are over. With a 30-year rate now close to 4.5%, Americans’ expectations of the real estate market are changing rapidly. Nearly 60% of respondents thought mortgage rates would rise over the next year, a significant 13 point increase from the previous period.
Risks and opportunities abound
Mortgage rates are tied to 10-year Treasury yields, which are on the rise as investors abandon the safety of government bonds for high-yield investments.
The problem is that higher mortgage rates and a lack of housing supply pose risks to US economic growth, which has become a bigger concern now that the Fed is raising rates.
Another risk threatening the US economic recovery and consumer confidence is the war in Ukraine, which has driven up the price of oil and raised real concerns among economists about other European economies, which are heavily dependent on Russian energy. A European economic slowdown would be just another unwanted risk for US businesses.
Some Fed watchers believe the Federal Reserve would have been more aggressive with its interest rate hike in March had it not been for the uncertainty caused by the Russian invasion.
While these are just a few of the risks that currently exist, you shouldn’t be too pessimistic.
“Rising oil prices are unlikely to trigger a recession as US consumers have strong job prospects, strong balance sheets and record levels of net worth,” said Richard Saperstein, chief investment officer at Treasury. Partners, based in New York.
The unemployment rate is currently at a very healthy 3.8% and there are around four million more job openings than before the pandemic. Initial jobless claims are at their lowest levels since 1969.
Perhaps more importantly, Covid-19 cases have declined significantly over the past two months, and states have removed almost all masking and social distancing requirements put in place to slow the spread of the pandemic.
Worries about another variant of Covid aside, that means more Americans could start to return to more normal spending habits. Among other things, this means more spending on vacations, hotels and restaurants, which can only help to further normalize conditions in the economy and consumer confidence levels.
Although high inflation can put pressure on potential travelers, forcing them to trim their sails.
Consumer confidence mostly unchanged
Consumers’ estimates of their financial fate haven’t changed much in the past two weeks. The overall level of consumer confidence seen in the latest Forbes Advisor-Ipsos consumer confidence survey rose one point to 53.5, roughly in line with what it was during the pandemic. That’s still 6.6 points below early March 2020 levels.
Two subcategories of the survey also showed little change.
The current index, which measures how people feel about their finances in the here and now, stands at 44.2, just 0.2 points higher than the last reading. Meanwhile, the employment index remained stable at 66.2.
More positive movement was found in investment expectations and metrics, consistent with a rising stock market in recent weeks after a miserable start to the year.
Survey methodology: Ipsos, which surveyed 904 respondents online on March 21 and 22, provided the results exclusively to Forbes Advisor. The survey is conducted every two weeks to track consumer sentiment over time, using a series of 11 questions to determine whether consumers have a positive or negative view of the current state of the economy and its future development.