Consumer sentiment sharply declined to 81.2 in July, down from 85.5 in June, amid inflation concerns as the economy slowly recovers from the COVID-19 pandemic.

The projected number was 80.8, according to the University of Michigan's Consumer Sentiment Index. The current reading of 81.2 is the lowest since February.

The reason for the drop is because consumers seem to be concerned about near-term inflation as expectations for the following year rose to 4.7% from 4.2% in June and remain higher than they have been in 10 years. Despite the news, Americans still believe inflation will remain at 2.8% over the next five years.

“While most consumers expect inflation to be transitory, there is growing evidence that an inflation storm is likely to develop on the not-too-distant-horizon,” said survey director Richard Curtin. “The improved finances of consumers have greatly reduced consumers' resistance to price increases,” Curtin added.

The survey’s barometer fell to 84.5 from 88.6, the lowest reading since August of 2020. Customer expectations also declined to 79.0 in July from 83.5 in June.

Consumer prices have risen by the largest rate since 2008 so it’s no surprise that inflation is such a concern for consumers, Curtin said.

“This reaction by consumers is unique and quite different from the inflationary psychology of the 1970s. In that earlier era, the booms were driven by the willingness of consumers to advance their purchases in an attempt to avoid future price hikes, now the coming boom will be due to income and job gains that make price increases easier to manage,” Curtin said.

However, some economists are not too worried about inflation concerns. “We have seen some substantial price readings in recent months and could see more, but we believe it will prove temporary,” said PGIM chief economist Nathan Sheets.

A lot of the inflation concerns boil down to pandemic-related demand, as the country opens back up, shutdowns end and people decide to go on vacation. The Biden council of economic advisors estimates that 60% of inflation in June was due to car prices alone, and another big chunk came from air travel as people return to pre-pandemic life.

Coronavirus Inflation