“Although consumer sentiment is still quite low by historical standards, we are starting to see some pretty dramatic improvements,”[ads1]; said Joanne W. Hsu, an economist at the University of Michigan and director of its closely watched consumer surveys. “It’s largely driven by a slowdown in inflation, especially with the decline in gas prices.”
That’s particularly good news for the White House, which has been hammered by criticism that it hasn’t done enough to tackle inflation.
Gas prices, which peaked at more than $5 a gallon in June, are down to about $3.74 a gallon nationwide. This 25 percent drop in costs has been significant for many Americans, especially those in lower-income households where gas costs make up a larger share of weekly expenses.
Overall inflation, meanwhile, has eased somewhat – prices were unchanged in July, though still up 8.5 percent from a year ago – as a result of aggressive rate hikes by the Federal Reserve.
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Nevertheless, the impact on both wallets and psyche has been swift. Measures of business conditions, the short-term economic outlook and purchasing plans all improved in August, according to key figures from the Conference Board. Consumer confidence rose that month after falling for three consecutive months, and the number of Americans reporting vacation plans hit an eight-month high.
“When gas prices go down at the pump, people immediately feel better,” said Diane Swonk, chief economist at accounting giant KPMG. “Inflation is still high, but the fact that gas prices have come from record highs makes a big difference in how much people spend and their expectations for the future.”
In Omaha, Nils Haaland says he feels much better about the economy now that filling up his Honda pickup costs $65 instead of $95. Haaland teaches theater at a folk college and sometimes works as a handyman. He says soaring fuel and food prices this summer forced him and his wife to stop eating out, postpone summer trips and buy less meat. Although prices are still relatively high, he says he feels less worried that inflation will continue to spiral out of control.
“For a long time I made sure that I didn’t just indiscriminately fill up my shopping cart at the grocery store, but now a lot of that behavior has loosened up a bit,” the 58-year-old said. “When gas went back to $3.50 a gallon, all of a sudden it was like, ‘Oh, we know how to make this work.’ Things are going to work out. “
The Fed has moved quickly to raise interest rates enough to contain inflation. While there are signs that its approach is working — prices have stabilized and home values are starting to cool in some parts of the country — there remain concerns that the central bank’s actions could slow the economy too much, tipping it into recession.
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The looming question, economists say, is whether the current calm signals a turning point for inflation, or whether this is just a brief respite before the economy worsens.
“The Fed still has a big challenge ahead of it, which is to cool inflation beyond gas prices and to control inflation before it fundamentally distorts people’s behavior,” KPMG’s Swonk said. “It’s getting very complicated now, and the more complexity there is, the greater the chance of a misstep as well.”
In California, Jack Foote says economic uncertainty is causing him to rethink his retirement plans. Foote, 58, had hoped to retire in June, but says a recent pay raise, coupled with lingering fears that the economy may still be sour, has kept him in his Los Angeles Unified School District administrative job a little longer.
“I generally feel better about gas prices and the economy, but I also worry about the possibility that things could still go south,” Foote said. “Maybe things are stabilizing for now, but it doesn’t feel like a sure thing.”
Although inflation remains a top priority for US voters ahead of the midterm elections, the share of Americans who say it is their biggest concern has fallen. About 30 percent of Americans say rising prices are their No. 1 voting issue, down from 37 percent in July, according to a new NPR/PBS NewsHour/Marist poll.
After more than a year of extensive price increases, many households have become more knowledgeable about their spending habits.
The Fed’s latest “beige book” report, released this week, found that many households have been shopping down to cheaper goods and are shifting more of their spending to necessities such as food.
That’s certainly been the case at Walmart, where executives say they’re seeing more middle- and high-income customers than usual. The retail giant, known for its low prices, is also finding that families are also more likely to buy store brands and cheaper alternatives such as hot dogs and tinned tuna instead of deli meats, for example, than a year ago.
“As the year has gone on, we’ve seen more pronounced consumer shifts and declining activity,” John David Rainey, the retailer’s chief financial officer, said on an August earnings call.
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Leslie Hix, 67, a retired account manager in Gadsden, Ala., says she and her husband have started traveling again now that gas prices are more manageable. They recently went to the Bahamas with their grandchildren and are going on a Mediterranean cruise this month.
“We saw gas prices go up all year, but it didn’t hit us until recently when we realized how much we had dipped into our savings,” Hix said, adding that she has also started grocery shopping at Walmart instead of buy grocery delivery from a more expensive chain.
“We’re not going back to all our old habits yet, but we certainly feel a lot better about the economy,” she said.
Some business owners are also noticing a shift. Suzanne Windham, a dentist in Shreveport, La., says clients have started spending more liberally. They are more willing to pay for expensive treatments than they were at the beginning of the year, when people expressed more fear of covid risks as well as their finances.
But now business is up 15 percent from last year, and Windham says she feels better about the economy.
“It’s surprised me that business has boomed, but it’s been really good,” she said. “People seem more relaxed and less worried.”