“While consumer confidence is still fairly low by historical standards, we are starting to see very significant improvements,” said Joanne W. Hsu, an economist at the University of Michigan and director of closely watched consumer surveys. “It’s largely driven by slowing inflation, particularly with lower gas prices.”
This is particularly good news for the White House, which has been criticized for not doing enough to tackle inflation.
Gas prices, which peaked at more than $5 a gallon in June, have fallen to About $3.74 a gallon nationally. This 25 percent reduction in costs was significant for many Americans, particularly those who live in lower-income households where gas costs make up a larger share of weekly expenses.
Meanwhile, overall inflation has eased slightly – prices held steady in July, although still 8.5 per cent higher than a year ago – as a result of a big hike in interest rates by the Federal Reserve.
However, the impact on both pocketbooks and psyche was swift. Gauges of business conditions, short-term financial expectations and buying plans improved in August, according to key metrics from the Conference Board. Consumer confidence increased that month after falling for three consecutive months, and the number of Americans reporting vacation plans reached an eight-month high.
“When gas prices go down at the pump, people immediately feel better,” said Diane Sonk, chief economist at accounting giant KPMG. “Inflation remains high, but the fact that gas prices are above their record levels makes a big difference in how much people spend and their expectations for the future.”
In Omaha, Nils Haaland says he feels a lot better about the economy now that filling up his Honda pickup costs $65 instead of $95. Haaland teaches theater at a community college and sometimes works as a handyman. He says rising fuel and food prices this summer have forced him and his wife to stop eating out, postpone summer travel and buy less meat. Although prices are still relatively high, he says he is less concerned about inflation continuing to spiral out of control.
“For a long time, I’ve been making sure I not only randomly filled my 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 will be okay. “
The Fed is moving quickly to raise interest rates enough to contain inflation. Although there are signs that her approach is working — prices have stabilized and house prices have begun to fall in some parts of the country — there is still concern that central bank actions could slow the economy too much, pushing it into recession.
Economists say the looming question is whether the current calm signals a tipping point for inflation, or whether this is just a temporary reprieve before the economy deteriorates.
“The Fed still has a big challenge ahead, which is to cool inflation beyond gas prices and control inflation before it fundamentally distorts people’s behavior,” said KPMG’s Sonk. “It’s getting very complicated now, and the more complex it gets, the higher the chance of something going wrong as well.”
In California, Jack Foot says economic uncertainty has prompted him to rethink his retirement plans. Foote, 58, had hoped to retire in June, but says a recent salary increase, along with persistent fears that the economy may remain faltering, has kept him in his administrative job at Los Angeles Unified School District for a little longer.
“I generally feel better in terms of gas prices and the economy, but I’m also concerned about the possibility that things will continue to go south,” Foote said. “Things may be stabilizing for now, but it doesn’t look for sure.”
Although inflation remains a top priority for American voters in the run-up to the midterm elections, the percentage of Americans who say it is their biggest concern has declined. About 30 percent of Americans say price hikes are their number one voting issue, down from 37 percent in July, according to a new report. NPR / PBS NewsHour / Marist Poll.
After more than a year of widespread price increases, many families are becoming more familiar with their spending habits.
The Fed’s latest “Beige Book” report, released this week, found that many households have moved to cheaper goods and shifted more of their spending toward necessities like food.
This has certainly been the case at Walmart, where executives say they see more middle- and high-income customers than usual. The retail giant, known for its low prices, has found that families are also more likely to buy store-bought brands and lower-priced options like sausage and canned tuna rather than cold cuts, for example, than they were a year ago.
“As the year progressed, we saw more pronounced shifts to consumers and lower business activity,” John David Rainey, the retailer’s chief financial officer, said on an August earnings call.
Leslie Hicks, 67, a retired account manager in Gadsden, Ala., says she and her husband are starting to travel again now that gas prices are more manageable. They recently went to the Bahamas with their grandchildren and went on a cruise on the Mediterranean this month.
“We’ve seen gas prices go up all year, but it only really affected us recently, when we realized how much we’re running low on our savings,” Hicks said, adding that she’s also started shopping for food at Walmart instead of getting groceries delivered from the more expensive chain.
“We’re not going back to all our old habits yet, but we feel a lot better about the economy,” she said.
Some business owners are noticing a shift, too. Susan Windham, MD, a dentist in Shreveport, Los Angeles, says clients are starting to spend more freely. They are more willing to pay for expensive treatments than they were at the beginning of the year, when people expressed fear about the risks of contracting the coronavirus in addition to their finances.
But business is now up 15 percent from last year, and Windham says she feels better about the economy.
“I was astonished by the boom in business, but it was really good,” she said. “People seem to be more relaxed and less anxious.”