Inflation worries are weighing on consumers. The University of Michigan’s Consumer Sentiment Index slipped to 66.8 in November, the lowest it has been in a decade and down from 71.7 in October. The slip in sentiment is attributed to both the escalating inflation rate and a belief among consumers that no effective policies have been developed to curb its surge.

In the survey, one in four respondents mentioned inflation-influenced reductions in their standards of living in November, most notably among lower-income and older consumers. While nominal income gains were widely reported, about half of those surveyed anticipated reduced real incomes next year due to inflation. Rising prices for homes, vehicles and durable goods were cited by those surveyed more frequently than any other time in more than half a century.

“The reactions of consumers to surging inflation should be no surprise, as it has been reported during the past several months,” says Richard Curtin, University of Michigan Surveys of Consumers’ chief economist. “The description that inflation would be ‘transient’ has the undertone that consumers could ‘grin and bear it’ as economic policies counted on a quick and automatic self-correction to supply and labor shortages. Instead, the pandemic caused economic dislocation unlike any prior recession, and has been intertwined with partisan interpretations of economic developments.”

Highlighting the partisan influence on consumer sentiment, Curtin noted that the moods of consumers play a central role in how information is processed—positive moods promote more casual and less detailed information processing, and negative moods promote more formal and deliberate information processing, especially of potentially negative developments. He says, “Partisans aligned with the President's party have adopted very positive moods, and those in the opposing camp very negative moods. As a result, partisan supporters either mentioned or ignored rising home and stock values, inflation and income growth rates, or mentioned or ignored employment or unemployment rates, and so forth. The partisan differences in perceptions were not minor, but were large and equal in size. They were larger than differences across income, age and education.”

Energy, shelter and vehicle costs are leading the inflation increases. Last week, the Labor Department released data on the consumer price index (CPI) for October, a metric based on a “basket” of goods that includes gasoline, groceries, rent and health care. October’s CPI rose 6.2 percent from October 2020, the largest annual increase since December 1990. Removing volatile food and fuel from the calculation, the so-called core CPI was up 4.6 percent from one year ago, still the largest year-over-year increase since August 1991. An increase in hourly earnings of 0.4 percent between September and October was more than swallowed up by the CPI surge—on a monthly basis, it increased 0.9 percent since September—pushing real wages after inflation down 0.5 percent.