There has been a lot of discussion about the negative impact of inflation on consumer sentiment. That certainly exists-but unemployment also has a negative effect. There is a (at least short-term) trade-off between the two. Relatedly, without the US recovery plan, the CARES Act, and the Fed’s expansionary monetary policy, what would be the unemployment rate?
This is a chart of the University of Michigan Consumer Confidence Index, month-on-month annualized inflation rate, and unemployment rate (the last two interest rates are in decimal format).
figure 1: Top panel, University of Michigan Consumer Confidence Index; middle panel, quarter-on-quarter annualized CPI inflation rate (logarithmic term, decimal format); bottom panel, unemployment rate (decimal format). The recession date defined by NBER ranges from peak to trough, shaded in gray. Source: University. Michigan, BLS, FRED and NBER.
What does it matter to use a simple OLS regression? Using monthly data, 1978-2021M10:
Super talk = 1.16 – 0.86 PI – 4.36 you + v
Adjectives R2 = 0.42, SER = 0.095, N = 526, DW = 0.25. bold Represents the significance of 5% msl, using HAC robust standard error.
One can report standardized coefficients (ie, scaled by standard deviation) to convey the relative importance of each variable in the movement of the left variable.
umcsent’ = —— 0.26 π’- 0.60 you’ + ‘
Or elastic at means:
Super Talk” = 1.35-0.034 π”- 0.315 you” + v”
So yes, with other conditions unchanged, the inflation rate is lower and consumer sentiment will be higher. However, if a lower inflation rate is associated with a higher unemployment rate, then the net effect will be ambiguous (unless trade-offs are taken during these pandemics).
Use quantile regression:
Super talk = 1.18 – 0.89 PI – 4.62 you + v
Adjectives R2 = 0.30, SER = 0.095, N = 526, bold Represents the significance of 5% msl, using Huber Sandwich robust standard error.
