“While consumer sentiment is still fairly low by historic standards, we’re starting to see pretty dramatic improvements,” said Joanne W. Hsu, an economist at the University of Michigan and director of its closely watched consumer surveys. “It’s very much being driven by a slowdown in inflation, particularly 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 address inflation.
Gas prices, which peaked at more than $5 a gallon in June, are down to about $3.74 a gallon nationwide. That 25 percent drop in costs has been substantial for many Americans, particularly those in lower-income households where gas costs make up a larger share of weekly expenses.
Overall inflation, meanwhile, has eased slightly — prices remained flat in July, though they’re still up 8.5 percent from a year ago — as a result of aggressive interest rate hikes by the Federal Reserve.
Even so, the impact on both pocketbooks and psyches has been swift. Measures of business conditions, short-term financial prospects and purchasing plans all improved in August, according to key metrics from the Conference Board. Consumer confidence increased that month after falling for three straight 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 Swonk, chief economist at accounting giant KPMG. “Inflation is still high, but the fact that gas prices have come off record highs makes a huge difference in how much people are spending and their expectations for the future.”
In Omaha, Nils Haaland says he’s feeling much 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 soaring prices for fuel and food this summer forced him and his wife to stop dining out, postpone summer travel 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 was making sure I wasn’t just indiscriminately filling up 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 are going to be okay.’ ”
The Fed has been moving swiftly to raise interest rates enough to contain inflation. Although there are signs that its approach is working — prices have stabilized and home values are beginning to cool in some parts of the country — there is still concern that the central bank’s actions could slow the economy too much, tipping it into recession.
The looming question, economists say, is whether the current calm signals a turning point for inflation, or whether this is just a momentary reprieve before the economy worsens.
“The Fed still has a big challenge ahead, 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 complex now, and the more complexity there is, there’s more chance of a misstep as well.”
In California, Jack Foote says economic uncertainty has him rethinking his retirement plans. Foote, 58, had hoped to retire in June but says a recent pay raise, combined with lingering fears that the economy may still sour, has kept him at his administrative job at the Los Angeles Unified School District for a bit 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 is still a top priority for U.S. voters in the run-up to the midterm elections, the share of Americans who say it is their biggest concern has fallen. Some 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 widespread price increases, many households have become savvier about their spending habits.
The Fed’s latest “beige book” report, released this week, found that many households have traded down to cheaper goods and are shifting more of their spending toward essentials like food.
That has 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 lower-priced options like hot dogs and canned tuna instead of deli meats, for example, than they were a year ago.
“As the year has progressed, we’ve seen more pronounced consumer shifts and trade-down activity,” John David Rainey, the retailer’s chief financial officer, said in an August earnings call.
Leslie Hix, 67, a retired account manager in Gadsden, Ala., says she and her husband have begun 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 going 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’s also started shopping for food at Walmart instead of getting grocery delivery from a pricier chain.
“We’re not going back to all of our old habits just yet, but we are absolutely feeling a lot better about the economy,” she said.
Some business owners are noticing a shift, too. Suzanne Windham, a dentist in Shreveport, La., says clients have begun spending more freely. They’re more willing to shell out for pricey treatments than they were at the beginning of the year, when people expressed more fear about covid risks as well as their finances.
But now business is up 15 percent from last year, and Windham says she is feeling 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.”
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