Interest Rate May Explain Consumer Sentiment Anomaly
Despite low unemployment and falling inflation, consumer sentiment in the U.S. remains low, puzzling economists. Researchers suggest that rising borrowing costs, which are not reflected in traditional price indexes, may explain this disconnect. Their findings indicate that consumer sentiment is closely linked to borrowing costs and credit supply, with alternative inflation measures accounting for much of the sentiment gap.
- ▪Consumer sentiment in the U.S. is currently depressed despite low unemployment and falling inflation rates.
- ▪Rising borrowing costs are proposed as a key factor explaining the gap in consumer sentiment.
- ▪Alternative measures of inflation that include borrowing costs can account for nearly three quarters of the sentiment gap.
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Home Research Working Papers The Cost of Money is Part of the Cost… The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly Marijn A. Bolhuis, Judd N. L. Cramer, Karl Oskar Schulz & Lawrence H. Summers Share X LinkedIn Facebook Bluesky Threads Email Link Working Paper 32163 DOI 10.3386/w32163 Issue Date February 2024 Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap.
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