Feelings of uncertainty and powerlessness are steadily building in consumers as prices for basic needs like gas, food and housing continue to rise.

Headshot of Peter Atwater
Peter Atwater ’83

“It’s relentless, and I think we underappreciate that there’s been two years of COVID fatigue on which this has been stacked,” said Peter Atwater ’83, adjunct professor of economics at William & Mary, founder of Financial Insyghts and an expert in confidence-driven decision-making in real time.

“It’s not the single vulnerability that we experience that matters as much as the stacked vulnerability, and today that burden is especially heavy.”

Atwater joined W&M News to discuss recent economic trends and look ahead to the future. The following interview has been edited for length and clarity.

Q: Do you see any relief in sight for soaring gas prices?

A: Back in March, I expected crude oil prices to eventually translate to lower prices at the pump. That didn’t happen, and in the process, other supply chain-related issues were uncovered in the refining area that have contributed to the spike we’ve seen since the middle of April. While crude oil prices are up a little bit since then, it’s nowhere near the move that we’ve seen in gas prices at the pump.  

I think we’re in a place where, at least looking at consumer confidence, I’m very noncommittal. I don’t have a strong view on gas prices here. Could they go higher? Yes, in which case I suspect they are likely to go substantially higher. I say that because typically commodities peak on an intense sense of scarcity – that everyone believes that demand will far outpace supply. Having seen that kind of spike back in March where that belief was true, I think we have to be open to the possibility that if there’s another spike, it’s likely to be at substantially higher prices, none of which would be good for the consumer. 

Q: You have spoken recently about feelings of powerlessness for consumers. What has led to this?

A: One of the pernicious aspects of inflation is that it affects us in both dimensions of certainty and control, particularly in food, energy and housing. We have no choice but to pay higher prices in the things we must have, and food, energy and housing top that list.

Any time you see those prices spiking, it really reinforces a sense of powerlessness. We feel hostage to the environment, imprisoned by it. At the same time, there’s a level of uncertainty with inflation that has to do with that scarcity aspect, that we’re not sure of prices ahead. What’s it going to look like? What happens if prices go higher? So as prices rise, we begin to extrapolate prices rising even higher.

And so, not surprisingly, what you’ve seen this year is a very clear connection between consumer sentiment and prices at the pump. The higher gas prices go, the lower consumer sentiment falls. I think there are a couple of reasons for that. Gas prices are everywhere, so we see the prices a lot. Gas is a relatively homogeneous product. We go to the gas station on a regular basis, so we’re very attuned to what it costs to fill up the tank. And so, again, not surprisingly, we see this very strong connection between consumer pessimism today and the price that they’re paying for gasoline. It’s much harder to make week-to-week comparisons on food products because we shop at different places. We may look at the cost of a gallon of milk and eggs, but once you get past the very basic staples, it’s a more complicated process for us to keep track of prices. We just know that they’re all higher today. 

Q: Are there any policy solutions to this? 

A: With the inflation backdrop and the concern that monetary and fiscal policy overdid itself two years ago, I think that there’s going to be great reluctance on the part of Washington to come to the aid of the economy until it’s very obvious that things have slowed down. I think the Federal Reserve has been so explicit about wanting to get inflation down that it’s unlikely they will provide the kind of economic stimulus that they have in the past by lowering interest rates until they’re sure that the inflation beast has been slain. I think that puts the Fed in a position of reacting to a slowing economy that’s already well into decline. 

Q: What are your feelings about the gas tax holiday proposals at the national and state levels?  

A: You’re seeing a lot of efforts both in terms of the state tax holidays and the release of the U.S. Strategic Petroleum Reserve to keep prices down. The challenge with this is that it does nothing to slow demand, and I think one of the uncertainties here is that as much as policymakers want to keep energy prices affordable, they’re playing a high-risk game that they can continue to boost supply at the same time.

I think we need to appreciate that there may come a time when slowing demand becomes important because there is an imbalance with supply. So as much as we want to celebrate the efforts that policymakers have provided, particularly in helping low-end consumers, we’re not facing the basic supply and demand challenge that is really behind so much of the price pressure today. 

Q: With inflation where it is, how worried should we be about a possible recession?

A: I don’t think it’s surprising that with pessimism as low as it is now that people are talking aggressively about recession. We don’t think of it this way, but when we predict a recession, we’re really creating a narrative that helps to reconcile our feelings and actions. Those exist in equilibrium, and a recessionary story seems like a very likely outcome to us when confidence is low. 

Do I think it’s going to happen? I think that we’re at one of those moments with consumer sentiment where either we rebound sharply and it turns out to have been a false concern about a recession or the economic downturn is materially worse than a recession. These are levels of consumer sentiment that we saw at the lows in the banking crisis, in the worst of inflation in 1980, so that the pessimism is intense right now. You have to look at that and say, well, if things get worse, then we’re likely to see an economy that reflects even darker, more negative sentiment, which would be something more significant than a recession. 

My more optimistic view is that because mood is so negative here, things should get better. This could be the kind of pessimism from which we see an uptick in the economy. I realize I’m talking like a two-handed economist, but the challenge with sentiment at this low level is that it would normally signal a sharp reversal that surprises everybody to the upside. I think it’s premature to say that. 

, Communications Specialist