Three-Quarters of Consumers Expect Rising Interest Rates

Consumer sentiment improved in June, showing that signs of economic recovery are strong, according to a new survey from the University of Michigan.

According to the university, the index of consumer sentiment improved for the month to 85.5 from May’s reading of 82.9 – the second-highest reading since the pandemic started.

Richard Curtin, the survey’s chief economist, wrote in the survey that while consumer sentiment dipped in late June, it still held steady at 3.1% above May’s reading.

All of June’s gains came from consumer households that had incomes that were above $100,000, and mostly by how future economic prospects were viewed. Consumers paid particularly close attention to inflation, unemployment, and interest rates, according to the survey.

“Not only did year-ahead inflation expectations fall slightly to 4.2% in June from May's decade peak of 4.6%, consumers also believed that the price surges will mostly be temporary,” Curtin said. “Declines in unemployment rate in the year ahead were expected by 56% of consumers, the largest proportion ever recorded in the history of the surveys.

“The growing strength in the economy meant that nearly three-quarters of all consumers expected rising interest rates during the year ahead, the highest proportion since 2018 when the economy was near its last peak,” he added.

Curtain continued by saying that at the start of the pandemic, consumers were uncertain about their jobs and income, home prices, vehicles, and household purchases – much of which has since improved.

“While many are optimistic about a gradual end to the pandemic, consumers still judged the risks from emerging COVID variants as appreciable,” he said. “It is likely that consumers will not reduce their savings and wealth to pre-pandemic levels, but maintain a higher level of precautionary funds. ”

The University of Michigan survey also showed that current economic conditions decreased from 89.4 in May to 88.6 in May, while the index of consumer expectations significantly increased from 78.8 in May to 83.5 in June.