(09/12/09) Econ.la / GyungJe.com -- The consumers are finally starting to feel good about their economic outlook recently. As the prices of commodities, especially the oil price, come down notably over the past four months, U.S. consumer confidence index soared rapidly to an eight-month high in September.

According to a survey conducted by the The Reuters/University of Michigan, the preliminary index of confidence jumped to 73.1 in September from 63.0 in August. The degree of increase marked the highest since January 2004 and it is the highest level in entirely year 2008. Also Septembers reading was significantly above economists' median expectation of 64.0.

The data reflects the fact that the consumers' spending pattern moves pretty much in tandem with price level of basic goods or necessities, such as gasoline, energy, food, and clothing. Such sudden decline of inflation expectation occurred only twice recently - Hurricane Katrina in 2005 and the September 11, 2001 terrorist attack on American soil.

Coupled with asset deflation, namely the recent housing decline, rising expectation of inflation directly affected consumers' confidence from January to August in 2008. The increase in the their confidence level caused by the sudden decline of inflation expectation opens the door of how we've been interpreting the nominal inflation index versus core consumer price index, CPI.

The Wall street has given too much weight on the core CPI and too little on the nominal CPI (which ignores the price volatility of food and energy). The September's reading of the confidence index demonstrated the degree in which food and energy price affects the level of consumers' confidence on the upcoming economic conditions and their spending and budgeting behavior.

Thomas Pak

Econ.la / GyungJe.com