Inflation is Back: American Consumers Are Worried

Inflation is Back: American Consumers Are Worried

Daniel Lacalle 19/05/2021 5
Why US Consumers Are Not Happy?

The University of Michigan consumer confidence index fell to 82.8 in May, from 88.3 in April.

More importantly, the current conditions index slumped to 90.8, from 97.2 and the expectations index declined to 77.6, from 82.7.

Hard data also questions the strength of the recovery. April retail sales were flat, with clothing down 5.1%, general merchandise store sales fell 4.9%, leisure & sporting goods down 3.6% with food & drink services up just by 3%.

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United States industrial production was also almost flat in April, rising just 0.4% month-on-month in April pushed by a 4% slump in motor vehicle production. You may think this is not that bad until you see that industrial capacity utilization came at 74.7% in April, significantly below the pre-pandemic levels.

Employment also questions the “strong recovery” thesis. Non-farm employment is still down 8.2 million, or 5.4 percent, from pre-pandemic level yet gross domestic product is likely to how a full recovery in the second quarter.

These figures are important because they come after trillions of dollars of so-called stimulus and the entire thesis of the V-shaped recovery comes from a view that consumption is going to soar. Reality shows otherwise. In fact, reality shows that retail sales showed an artificial bump due to the wrongly called stimulus checks only to return to stagnation.

The rise in inflation further questions the idea of a consumption boom, certainly for the middle class. Why? If we look at the 4.2% rise in consumer price index in April includes a 25% increase in energy, a 12% increase in utility prices, a 5.6% increase in transportation services, a 2.2% in medical services etc. As consumers perceive a higher rise in prices, especially in those essential goods and services that we purchase every day, consumption decisions become more prudent and propensity to save rises. This is something that we have seen in numerous countries. In Japan, years of “official” messages about the risk of deflation clashed with citizens’ perception of cost of living, and tendency to save increased, rightly so. Citizens are not stupid, and you can tell them that there is no inflation or that it is transitory, but they feel the rise in cost of living and react accordingly.

Two things should concern us. First, the weakness of the recovery in the middle of the largest fiscal and monetary stimulus seen in decades, and second, the short and diminishing effect of these programs. A two trillion stimulus package creates a very short-term impact that lasts less than five months.

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I recently had a discussion with Judy Shelton, and she stated that the recovery would be stronger without stimulus. She is probably right.

Neo-Keynesians will likely say that if the above figures persist, the solution is more stimulus, but it is not. More money to government programs means slower growth and weaker recoveries.

The American consumer is not happy. They do not see the official optimism about the job market or the macro figures, and the current sugar-high is likely to lead to an abrupt sugar-low.

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  • Cindy Mooney

    Never thought I would say this but I miss Trump

  • Thomas Kay

    US consumers are not confident because of inflation

  • Carl Johnson

    Biden's first 100 days were impressive... Now it's getting stale.... He gotta shake things up....

  • Scott Andrews

    Not surprised at all !

  • Jonas Reynaws

    It's not good at all for the Biden administration

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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