A measure of demand by USA consumers has hit all time low at a time which is seeing very high consumer price inflation, a paradox of sorts, creating a unique situation which can be termed as “Demand Destruction”. Each month University of Michigan publishes USA Consumer Sentiment Index. The consumer confidence measures were devised in the late 1940s which have now developed into an ongoing, nationally representative survey based on telephonic household interviews, and the index is normalized to have a value of 100 in the first quarter of 1966. This index helps to understand how consumers view their own financial situation and the economy, short-term and long-term.
The official release from the university states,”The final June reading confirmed the early-June decline in consumer sentiment, settling 0.2 Index points below the preliminary reading and 14.4% below May for the lowest reading on record. Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession……Consumers also expressed the highest level of uncertainty over long-run inflation since 1991, continuing a sharp increase that began in 2021.”
Central Banks across the globe have been raising rates in a very aggressive manner, perhaps most aggressive in this millennium. Soaring Food and Fuel prices over last three month have posed high inflation problem in front of surprised central banks which have been pumping liquidity since Global Financial Crisis. Higher and adamant inflation level might have started due to supply constraints but demand for goods came at unprecedented speed too. Especially in USA where almost half of consumed goods are imported and increase in disposable income of lower income strata on account of covid relief fund distributed fuelled unprecedented demand for available goods. Covid induced social distancing norms meant much of this extra cash in hands could not be spent on services. The sudden surge in demand for goods and inability of producing at home meant windfall gains opportunities for shipping companies though. However painful the situation became due to runaway inflation, supply side ramp up is no where in sight for the biggest economy in the world. A measure of activities in US manufacturing and services, Composite Purchasing Managers Index, fell to lowest level in last 5 months too. With no surge in supply to match the unmet demand consumers are feeling low in confidence about their financial condition as well as robustness of the economy, i.e. needs of goods has to be withdrawn – Demand Destruction is here.
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