Growing borrowing costs offset easing inflation

January 27, 2023

Consumer sentiment lifted for the second straight month in January, rising 9% above December but remaining about 3% below a year ago, according to the University of Michigan Surveys of Consumers.

Easing inflation and strong incomes provided welcome support to the personal finances of American consumers and buoyed their views of current economic conditions, said U-M economist Joanne Hsu, director of the surveys.

However, the short-run economic outlook fell modestly from December, with two-thirds of consumers expecting an economic downturn in the year ahead, she said. In contrast, the long-run outlook rose 10% to its strongest level in nine months, though it remains 15% below its historical average.

“Slowing inflation provides some much-needed upward momentum for consumer sentiment. However, global factors like the end of China’s ‘zero-COVID’ policies may put additional upward pressure on inflation,” Hsu said. “Furthermore, the debt ceiling debate looms ahead and could reverse the improvement in sentiment seen over the last several months; past debt ceiling crises in 2011 and 2013 prompted steep declines in consumer confidence.

Consumers expect further slowdown in inflation

The recent easing of inflation boosted consumer attitudes, and consumer assessments of their personal finances surged 19% to its highest reading in eight months. A still-sizable 36% of consumers reported that their living standards are being eroded by inflation, the lowest share since April 2022.

Consumers voiced fewer concerns over gas and food prices in January, and a declining share of consumers blamed high prices for poor buying conditions for durable goods, cars, as well as homes. However, concerns over inflation remain substantially higher than a year and a half ago prior to the onset of elevated inflation.

Escalating borrowing costs weigh on consumers

While slowing inflation has been welcomed by consumers, sentiment has been partially offset by the negative impact of rising interest rates, Hsu said. Consumers continued to note the growth of borrowing costs; for the third straight month, over 30% of consumers spontaneously mentioned high interest rates weighing down buying conditions for
durables, vehicles or homes.

The share of consumers expecting further rate hikes this year fell from the all-time peak of 88% in April 2022 but remained high at 70%, indicating that these concerns will remain salient, she said. While the slowdown in inflation increases the purchasing power held by consumers, the continued rise in borrowing costs weighs down consumers’ willingness to spend.

Consumers’ views of housing markets have also continued to worsen in the wake of rising interest rates. About 31% of consumers expected home prices to fall in the year ahead, the largest share since this question first appeared on the January 2007 survey.

Consumer Sentiment Index

The Consumer Sentiment Index rose to 64.9 in the January 2023 survey, up from 59.7 in December and below last January’s 67.2. The Current Index rose to 68.4, up from 59.4 in December and below last January’s 72. The Expectations Index rose to 62.7, up from 59.9 in December and below last January’s 64.1.

About the surveys

The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.

Surveys of Consumers
U-M Institute for Social Research