WASHINGTON – U.S. consumer sentiment rose in December to its highest level since July, lifted in part by low inflation, which has boosted Americans’ purchasing power.
The University of Michigan’s consumer sentiment index, released Wednesday, rose to 92.6 from 91.3 in November. That’s just below this year’s average of 92.9, the highest annual average in 11 years.
The mood of consumers has been boosted this year by steady hiring, which has brought the unemployment rate down to a seven-year low of 5 per cent. There are also early signs that businesses are offering higher pay to attract and keep workers.
At the same time, Americans are responding positively to persistently low prices. They are more optimistic about their inflation-adjusted incomes than at any time since 2002, the Michigan survey found.
Consumer spending has picked up this year as modest gains in income and cheaper gas have put more money in Americans’ wallets. The greater spending has offset drags on the economy from a strong dollar, which has depressed exports by making U.S. goods pricier overseas, and cheaper oil, which has caused widespread job cuts in oil patch states.
“The economic fundamentals are in place for relatively strong 2016 consumer spending,” said Chris Christopher, an economist at IHS Global Insight. “Several positives such as lower gasoline prices, modest consumer price inflation and increasing consumer confidence are assisting many lower- and middle-income households in spending a little more freely.”
Spending grew 0.3 per cent in November, the government said Wednesday in a separate report, after no change in October.
Low inflation has increased consumers’ buying plans for household appliances, cars, and other big-ticket items to the highest level in a decade, the Michigan survey found.
For now, inflation remains low, having risen just 0.4 per cent in the past 12 months, according to the Fed’s preferred inflation gauge.
The proportion of consumers who think inflation is eroding their living standards fell to the lowest point in more than a decade, the Michigan survey found.
Even so, Americans’ dependence on discounts could pose a future challenge for the economy if consumers begin to scale back their purchases once prices rise. Typically, inflation rises as economic growth picks up. The Federal Reserve expects inflation to move closer to its 2 per cent target over the next two years.
That’s why Fed policymakers last week raised the short-term interest rate they control for the first time in nine years.
Consumers may easily handle higher prices if wages also increase. There are signs that is happening — wages and salaries rose a solid 0.5 per cent in November, the government said — but pay increases have been generally sluggish since the recession ended more than six years ago.