Thomasville Times

Unfortunately expect more inflation soon



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Expectations are important. They frame the way we think and how we act. Importantly, expectations are one of the major determinants of consumer demand for a product or service. And consumer expenditures comprise about 70 percent of GDP.

Expectations can be self-fulfilling. If consumers expect future shortages of an item, they buy more of it, and this helps create a shortage. Or if people expect a future surplus, they refrain from buying. And reduced consumer demand leads to a surplus.

That consumer expectations are important is underscored by the monthly survey of consumer sentiment published by the Survey Research Center of the University of Michigan. The findings are widely anticipated and closely watched each month.

The survey has been published continuously since 1946. Its price change data serve as a benchmark among many economists. The survey was founded by economist George Katona to gauge the sentiments of World War II soldiers returning to a peacetime economy.

This brings us to the critical survey for June. It revealed widespread pessimism among American consumers. In fact, consumer confidence in the economy was at the lowest level since the beginning of the survey in 1946. Almost four out of five respondents expressed pessimism regarding future business conditions. Almost half believed inflation is lowering their living standards. It is significant that Federal Reserve Chairman Jerome Powell noted that rising inflation expectations found in the survey played a role in the Fed’s decision to lift interest rates at its June meeting.

The effects of inflation are widespread throughout the economy. We all see this when we shop for groceries, purchase gasoline, or pay utilities bills.

An important — but not entirely unexpected — development relating to inflation has occurred in the housing market. As this is written, the average fixed-rate mortgage is 5.81 percent, an increase more than two full percentage points above that at the beginning of the year. As the mortgage rate has risen, the sales of previously owned homes have dropped for four straight months. They constitute the bulk of the housing market. Housing experts predict the housing market will continue to fall sharply over the next months.

What can we make of the steep decline in consumer confidence in the economy? Unfortunately, this tells us we can expect more inflation and a continuation of extremely high prices for items we buy. Get ready to open up your wallets! Conditions are going to get worse before they get better.

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