Consumer Confidence Declined In May Amid Inflation And Rising Interest Rates

Key takeaways

• The Conference Board’s Consumer Confidence Index fell in May amidst 40-year-high inflation
• Consumers cite increasing worries about food and energy prices, plus decreasing desire to buy expensive items like cars and houses
• Consumers also perceived the labor market to be slightly worse in May despite record-high job openings
• The numbers suggest that the Federal Reserve’s aggressive inflation policies have begun to trickle throughout the economy

“Consumer confidence dipped slightly in May, after rising modestly in April… Looking ahead, expect surging prices and additional interest rate hikes to pose continued downside risks to consumer spending this year.”

Those are two of the biggest takeaways from this month’s Conference Board’s Consumer Confidence Index Survey. While the highest inflation in four decades rages on, consumers cite increasing worries about rising food and energy prices.

As a result, public sentiment remains somewhat pessimistic, especially as higher prices weigh on tightening household budgets. And with annual inflation expectations hovering around 7.4%, fewer consumers plan to buy big-ticket items like houses, cars and large appliances.

All in all, Americans saw their prospects dim slightly for the next year. But that’s not to say that all hope is lost—not even close.

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The Consumer Confidence Index results

The Conference Board’s monthly Consumer Confidence Survey, published on Tuesday, reported mixed views of the current economic situation. By and large, consumer confidence and perceptions waned in May, spurred on by high inflation and rising interest rates. However, the survey reported a fair bit of positive sentiment, too.

The Consumer Confidence Index, which measures overall consumer perception, slipped from 108.6 in April to 106.4 in May. That said, May’s reading is still strong, and the Index remains stoutly above pandemic-era lows.

A look at the business and labor markets

The research group also released its Present Situation Index metrics, which evaluates consumer sentiment concerning current business and labor conditions. While the Index fell from 152.9 to 149.6 between April and May, underlying metrics came in mixed.

For instance, while 20.8% of consumers said business conditions were “good” in April, that number rose to 21.1% in May. Conversely, the number of consumers who said business conditions were “bad” fell from 22.2% to 20.7% in the same period.

The Conference Board also released its Labor Market Differential examining perceptions on job acquisition. Once again, the numbers declined from April to May, falling from 44.7 to 39.3.

While April saw 54.8% of consumers say jobs were “plentiful,” only 51.8% said the same in May. And the number of consumers who said jobs are “hard to get” rose from 10.1% to 12.5% month-over-month.

Admittedly, this drop in consumer confidence is relatively small. However, it does suggest that the Federal Reserve’s increasingly aggressive stance on inflation may have begun to slow demand.

At the same time, consumer perception may not accurately reflect the job market, as unemployment remains at 3.6%—just 0.1% higher than the post-pandemic half-century low seen the year before the pandemic. Additionally, the Conference Board notes that it “expect[s] labor market conditions to remain relatively strong.”

Future expectations also see notable declines

The Conference Board’s Expectations Index, which looks at consumers’ six-month expectations for income, business and labor conditions, declined in May, too. While April saw an Index score of 79, May’s came in at just 77.5.

The Expectations Index remains one of the survey’s weakest points as consumers continue to worry about the future.

For instance, 17.7% of consumers expect business conditions to improve in the next six months, down from April’s 18.6%. In the reverse, 24.9% of consumers now expect conditions to worsen, compared to 21.7% last month.

In the labor market, 18.5% of consumers expect more jobs to become available, virtually unchanged from April’s 18.4%. However, 14.5% expect their incomes to decrease compared to last month’s 13.3%. (Though 19% expect incomes to increase compared to 17.8% in April.)

Inflation eats into consumer confidence, buying plans

The Conference Board also noted in Tuesday’s brief that “purchasing intentions for cars, homes, major appliances, and more all cooled.” The Board blames rising interest rates and pivot from big-ticket to service spending for this declining emphasis on big-ticket spending. Not only that, but the Board added, “vacation plans have also softened” with inflation remaining “top of mind” for consumers.

The Labor Department reported earlier in May that consumer prices jumped 8.3% year-over-year (YOY) in April, compared to 8.5% in March. And U.S. producer prices soared 11% YOY in April, which may burden prices for a few months yet.

All told, consumers expect inflation to rise about 7.4% in the next year, compared to 7.5% expected during April’s peak.

To combat 40-year-high inflation, the Federal Reserve has already hiked policy interest rates 0.75% this year. (75 basis points.) The Fed also plans to hike the overnight rate an additional 0.5% during both its June and July meetings. If inflation continues to climb or fails to fall to acceptable levels, more rate hikes could come in 2023.

With prices rising across the board (but especially in sensitive areas like food and energy) fewer Americans now plan to go all-out on expensive purchases like cars, refrigerators and housing. If spending remains low, economic growth could slow, potentially cooling inflation.

However, current indicators suggest that buying will remain at high enough levels for consumer spending to grow overall.

Regain your consumer confidence with Q.ai

The numbers don’t lie: Despite ongoing economic growth, consumer confidence has slipped in recent months. But that doesn’t mean yours has to drop, too.

Q.ai can help consumers gain more confidence with our full range of Investment Kits —and, most notably, our Inflation Kit. This Kit can boost your portfolio by potentially offsetting some of the negative impacts of inflation while helping you save for those big-ticket items you may have been putting off.

You can also check out the Bond Spread Kit. The current spread between corporate bonds and treasury yields is a reflection of investors’ fears about the health of large US companies—but we believe those fears to be overblown. That’s why we created this Kit that buys corporate bonds and shorts treasuries to isolate the risk premium between them.

Let Q.ai help build back your confidence.

Download Q.ai for iOS today for more great Q.ai content and access to over a dozen AI-powered investment strategies. Start with just $100. No fees or commissions.