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  • uzmakrauf

Do you know why managing Consumer Confidence is so critical for managing inflation?

It’s because people behave based on how they “feel”.

If we feel things are going to get worse, and prices will go up ↠ we could start stocking up ↠ hence raising demand ↠ leading to inflationary pricing!

What we feel, drives what we do, and can be self-fulfilling.

Source: WSJ, University of Michigan, US Bureau of Economic Analysis

Black line = GDP, Blue/Orange line = Consumer Sentiment Index

The above chart, overlaying Consumer Sentiment against Gross Domestic Product (GDP - economic growth) shows very strong alignment of their 2 trends over time ... with Consumer sentiment being just ahead (almost driving) what happens with the GDP!

Here is a great video by the WSJ that explains this well.

The video includes some background on Dr. Katona, who created the Consumer confidence Index for the University of Michigan. While he was an economist, importantly he was also a psychologist!

He knew how people behave isn’t just about their rational, but very much about their emotional too.

{BTW – this is what good consumer research delves into too!}

This explains why the Federal reserve monitors Consumer Sentiment and Confidence indices so closely, as they know they are their key to bringing down inflation.

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