Inflation Hits Consumer Sentiment

Consumer confidence hit a 10-year low in November as inflation climbed to the highest levels since the early 1990s, complicating efforts from policymakers to sell the case that the current surge of price increases is temporary.

The plunge in sentiment happened as workers quitting their jobs hit a fresh record in a labor market that has nearly three million more positions available than there are people looking or jobs.

In a sign of confidence in the labor market, 4.43 million people quit, part of what some have called “The Great Resignation,” the Labor Department reported Friday. That number topped August’s 4.27 million and bought the quits rate as a percentage of the labor force to 3%, also a record.

At the same time, the University of Michigan Consumer Sentiment Index tumbled to 66.8 for November, according to a preliminary reading Friday. That was the lowest since November 2011 and well below the Dow Jones estimate of 72.5. October’s reading was 71.7, meaning that the November level represented a 6.8% drop.

The survey showed consumers expecting still-higher rates of inflation, with the 12-month forecast nudging up to 4.9%.

“Consumer sentiment fell in early November to its lowest level in a decade due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,” said Richard Curtin, the survey’s chief economist.

The survey showed 1 in 4 consumers reducing their living standards due to price increases, while half of all families anticipated lower real income in the year ahead when adjusted for inflation.

Seemingly robust increases in average hourly earnings, which rose 4.9% in October from a year ago, still have not kept pace with inflation, bringing real wages down by 1.2% from the same period in 2020.

“Rising prices for homes, vehicles, and durables were reported more frequently than any other time in more than half a century,” Curtin added.

The gauge also indicated a low level of belief that policymakers are acting appropriately to handle inflation, which ran at a 6.2% rate for October, according to the consumer price index released Wednesday.

The news on consumer sentiment comes with President Joe Biden’s popularity levels dropping as consumers increasingly worry about inflation.

Earlier this week, the White House rolled out a few proposals to try to help, including trying to alleviate cargo backlogs at major ports. Tie-ups in supply chains are helping drive the price increases, as is strong demand from consumers and escalating gas prices as the administration has sought to clamp down on fossil fuels.

The Federal Reserve faces a similar dilemma as it seeks to meet its mandate for price stability without raising interest rates. Central bank officials said last week they expect to start withdrawing their policy support, but only incrementally with small reductions in monthly bond purchases until the program is finished, likely by early summer 2022.

Republican critics blame the trillions in government spending and loose Fed policy for helping fan the inflation fire. Both Biden and Fed Chairman Jerome Powell have said they expect the inflationary pressures to ease later next year.

Job quits hit a record

Despite the continued decline in how people feel about the economy, workers again left their jobs in record numbers during September.

The September total was 1.1 million higher for the same month a year ago, when the quits rate was just 2.3%.

At the industry level, the quits rate for leisure and hospitality rose to 6.4%, a 0.3 percentage point gain from a month ago and owing to a big jump in arts, entertainment and recreation, which surged to 5.7% from 3.2%. Accommodation and food services held steady at 6.6%, the highest of any industry, as is typical.

Those who have quit their jobs this year largely have gone onto positions with higher salaries.

The Atlanta Fed’s wage growth tracker shows pay up 3.6% overall in September from a year ago, with job switchers seeing a 4.3% increase. Gains have been skewed to higher earners, with the top quartile seeing a 12-month increase of 4.9%.

Hires totaled 6.46 million for the month, a slight decline from August.

That exodus from current positions came as available jobs remained elevated.

The Labor Department in its Job Openings and Labor Turnover Survey said there were 10.44 million employment openings, well above the 7.68 million people looking for jobs in September. JOLTS data runs a month behind the department’s widely watched nonfarm payrolls report.

Job openings in September were expected to total 10.46 million, according to FactSet.

What looked like a big jump in workers’ wages during October turned into just another gut punch after accounting for inflation.

The Labor Department reported Friday that average hourly earnings increased 0.4% in October, about in line with estimates. That was the good news.

However, the department reported Wednesday that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.

That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month. So an apparent solid paycheck increase actually turned into a decrease, and another setback for workers still struggling to shake off the effects of the Covid pandemic.

“For now, inflation is going to continue to run above very solid wage growth,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council during the Trump administration. “This is why when you look at consumer confidence, it’s really taking a beating. Households do not like the inflation story, and rightly so.”

Indeed, while consumer confidence leaped higher from the lows of the pandemic around April 2020 for a solid year after, it has come down substantially since, coinciding with the rise of inflation to its highest pace in more than 30 years. The University of Michigan’s closely watched index of consumer sentiment for August slumped to around its lowest level in nearly a decade.

Wages, though, have swelled during the period, with average hourly earnings up 4.9% year over year in October. However, compared with inflation, real hourly wages actually have declined more than 1.2% during the same time frame, according to the Labor Department.

Real weekly earnings have been even worse, dropping 1.6% during the period when accounting for the 0.3% decrease in the average workweek.

Consumers have responded by ramping up their inflation expectations, which historically have been tied closely to gasoline prices. Costs at the pump have swelled 49.6% over the past 12 months, the Labor Department reported in Wednesday’s consumer price index reading.

The New York Federal Reserve’s most recent survey of inflation expectations, released Monday, indicated that consumers expect inflation to run at a 5.7% pace over a one-year horizon, the highest ever for a data set that goes back to June 2013.

“That means there is a potential structural break in inflation expectations,” LaVorgna said. “Unless there is a collapse in growth where you have a recession, we could be entering a new inflation regime.”

Heat’s on the Fed

Either way, the Fed finds itself under increasing pressure to adjust policy accordingly. Central banks raise interest rates to combat inflation, though officials have said repeatedly they don’t anticipate doing so until at least well into 2022.

While central bank officials mostly insist that inflation will abate over the next year or so as conditions unique to the pandemic subside, the data pattern shows the Fed has underestimated price pressures.

Supply chain issues probably “will ease markedly over the next year and do not require a monetary policy response,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“But the Fed is now putting a great deal of faith in the idea the wages soon will be constrained by rebounding participation, and that stronger productivity growth will hold down unit labor costs growth too,” Shepherdson added in a note. “This is entirely reasonable, but not certain, and in the meantime core CPI inflation is going to rise further; the October print is not a fluke.”

Almost all economists join Fed policymakers in believing that the current inflation run bears little resemblance to the pernicious stagflation – high inflation, low growth – of the 1970s and early ’80s. However, there is some similarity, at least in that inflation cycles usually feel good in the beginning as wages are increasing but eventually become problematic when pay can’t keep up with rising prices.

The Fed has insisted on characterizing the current inflation run as “transitory,” even with the consistent increases.

“The risk that they cannot hold the ‘transitory’ line is rising,” Shepherdson wrote. “We remain baffled as to why Chair Powell chose not to warn markets explicitly of the risk of a run of big increases in the core CPI over the next few months; the components which drove up the October reading were all foreseeable.”

The question ahead is how long the current space of inflation will last, and Shepherdson said he expects core inflation, now around 4.6% year over year, to top out over 6% and run that high through March, “massively increasing the pressure on Chair Powell and other Fed doves.”

LaVorgna said he also expects some relief next year, but not without inflation running around 6% for several more months.

“I’m optimistic you’ll see some moderation in inflation, which means you’ll see real wages back in positive territory by the back half of next year,” he said. “But inflation will remain uncomfortably high.”

I'm not sure what will happen to inflation in a year but real wages will not rise markedly, that much I can assure you.

If they do rise, it means labor is winning over capital, and that will be bad for stocks and wealthy asset owners.

Anyway, stocks ended week on a high note but action is very choppy.

Given the strong gains this year, I'd be surprised if there's anything negative from now till the end of year but you never know, this market can turn nasty on a dime. 

If inflation pressures remain strong or gain momentum, this will have an impact on markets.

Alright, let me wrap it up there, here are this week's sector performance figures:

Materials (XME) had strong gains led by shares of MP Materials Corp (MP) and Alcoa Corporation (AA). Apart from that, not exactly a stellar week but some stocks posted decent gains. 

Below, consumer sentiment plunges to a 10-year low. With CNBC's Melissa Lee and the Fast Money traders, Steve Grasso, Bonawyn Eison, Nadine Terman and Jeff Mills.