U.S. consumer sentiment continued to improve in late April as job gains surged and economic activity recovered across much of the country. But the strength of consumer spending could lead inflation higher than desired.
The University of Michigan’s final sentiment index for April rose to 88.3 from the midmonth reading of 86.5, data released Friday showed. This was up from 84.9 in March.
The improvement was better than expected. Analysts surveyed by Econoday had forecast a rise to 87.1. The index is now at the highest level in 14-months.
“The April survey recorded continued gains in consumer confidence due to a growing sense that the upward momentum in jobs and incomes will persist,” said Richard Curtin, the survey’s chief economist. “Overall, the data indicate an exceptional outlook for consumer spending through mid-2022.”
The numbers are so strong that they likely indicate that inflation will not be mild and transitory, as Fed officials expect.
“While temporary price hikes are anticipated, the robust increases in consumer demand will act to lengthen and heighten inflation above the modest increases now anticipated,” Curtin said. “It will be a challenge to fine-tune fiscal and monetary policies that allow inflation to modestly exceed the 2% target for a limited time without contributing to an underlying upward momentum in inflation.”
Part of the difficulty is that consumers—mirroring the forecasts of Fed officials—already expect some temporary inflation, so consumer optimism is likely to remain strong even if prices rise.
The Biden administration has proposed massive spending bills that make fiscal restraint appear unlikely. Fed officials have indicated that they believe rates will stay low through at least next year.
Consumer expectations, which reflect the forecasts of conditions in the next six months, improved in late April. The indicator increased to 82.7 from the 79.7 reading registered in both the prior month and the preliminary estimate.
“The largest and most important change in April was that an all-time record number of consumers expected declines in the unemployment rate during the year ahead,” Curtin said.
Americans’ assessment of the current economic conditions was unchanged from the mid-month reading, when it rose to 97.2 in April from 93.0 in March.