MARK-TO-MARKET: Inflation and rising interest rates are testing consumer morale | Business & Economy

Without a doubt, the American consumer is the backbone of our economy. Consumer spending is responsible for more than two-thirds of our country’s total economic growth. Over the past two years, it has been the American consumer who has driven most of the post-pandemic recovery of our economy.

But inflation continues to weigh heavily on consumers’ psyches and wallets. Last summer, inflation rose rapidly from 1.7% to 5.3%. Today, inflation stands at 7.9%, a 40-year high, and is expected to rise further in the coming months.

To help contain this rise in inflation, the US Federal Reserve is bracing consumers for a wave of interest rate hikes. On March 16, the Fed enacted its first rate hike to the benchmark federal funds rate since 2018. The Fed plans six more rate hikes of 0.25% this year and three more in 2023. That means consumers will pay higher interest rates to borrow money. , further straining household budgets.

The growing pressure on American consumers is evident in the latest Consumer Sentiment Index, released by the University of Michigan. This indicator index tracks consumers’ perception of their financial situation and their future expectations for the economy. Over the past 12 months, the index has continued to decline. On Friday, the March index was reported at just 59.4, its lowest level in more than a decade. January and February were reported at 67.2 and 62.8, respectively.

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In its March survey, the University of Michigan cited rising inflation as the main cause of consumer pessimism. Rising fuel prices and the ongoing war in Ukraine were other key factors. Thirty-two percent of consumers expect their financial situation to deteriorate in the coming year, the highest percentage on record. Consumers also expressed a negative outlook on the overall US economy.

All in all, the American consumer has done an admirable job of dealing with rising prices. But at some point, do consumers reach a breaking point where prices just get too high? Will consumer spending, and therefore economic growth, come to a screeching halt?

Confident and optimistic consumers tend to spend their money more freely. Clearly, this optimism is wavering. In our economy, the American consumer reigns supreme. Unfortunately, the resilience of American consumers is starting to show obvious signs of wear and tear.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment advisor to Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed in this document are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell securities at any particular price. The information has been obtained from sources believed to be reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the United States Securities Exchange Commission.

Leslie M. Gill