ANN ARBOR—The corrosive impact of high gas prices and rising interest rates on household budgets has finally caused a sharp realignment of consumers’ economic expectations.

“Consumer confidence tumbled in May under the weight of high gas prices and rising interest rates,” according to Richard Curtin, the director of the University of Michigan’s Surveys of Consumers in the Institute for Social Research.

The May Sentiment Index was at its lowest level in more than a decade, aside from three months that were due to temporary circumstances following Hurricane Katrina and the initial invasion of Iraq.

The Index of Consumer Sentiment was 79.1 in the May 2006 survey, down from 87.4 in April and 86.9 recorded in last May’s survey.” Rising gas prices had a much greater impact on consumers’ evaluations of current economic conditions than on future economic prospects,” Curtin said.

The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 68.2 in the May 2006 survey, down from 73.4 in April and 75.3 in the May 2005 survey. In comparison, the Current Economic Conditions Index plunged to 96.1 in May, down from 109.2 in April and 104.9 last May.

When consumers were asked to describe in their own words recent economic developments, high gas prices were cited by more consumers than at any other time in the long history of the surveys, and the highest proportion in more than a quarter century volunteered that high prices had worsened their financial situation.

“Consumers viewed their financial prospects less favorably than any time during the past decade, with consumers expecting a much higher inflation rate as well as much smaller wage gains during the year ahead,” Curtin said. An inflation rate of 4 percent was expected during the year ahead by consumers in the May 2006 survey.” Other than for the two months following Katrina, this was the highest year-ahead inflation rate expected by consumers since 1990″ which was also caused by surging gas prices,” Curtin said.

More than three in four consumers in the May survey anticipated interest rates would continue to increase during the year ahead. Consumers have not changed this view since the May 2004 survey, giving no indication that they expected the end of the rate hike cycle was near.

Combined with higher prices, consumers expected the economy to weaken rather than strengthen in late 2006 by more than a two-to-one margin in May.” The majority of consumers expected a slowdown in economic growth in the last half of 2006, and half of all consumers expected an economy-wide downturn sometime during the next five years,” Curtin said.

Vehicle buying plans fell to their lowest level since 1991. While fewer consumers mentioned the availability of discounts on prices or interest rates, uncertainty about future gas prices as well as concerns about the mileage attainable on today’s new vehicles had a relatively larger impact on the recent decline in favorable assessments. Home buying attitudes were unchanged at the least favorable since 1990 due to rising mortgage rates and high home prices.

Institute for Social Research