Consumer Outlook Dims Amidst Inflation Concerns and Trade Policy Uncertainty
American consumer sentiment experienced a decline in February, driven by heightened inflation expectations related to Trump's trade policy. According to the latest University of Michigan consumer sentiment survey, the headline sentiment index fell by nearly 10% from January to a reading of 64.7.
Inflation concerns escalated the decline, with one-year inflation expectations jumping to 4.3% from 3.3% in the previous month. This marked the highest reading since November 2023 and the second consecutive month of "unusually large" increases.
"Consumers expect inflation to rise both in the coming year and over the next five years," said Joanne Hsu, director of consumer surveys at the University of Michigan. "These expectations are fueled by concerns over tariffs and their potential impact on prices."
Long-run inflation expectations, which gauge expectations for the next five to 10 years, also rose from 3.2% in January to 3.5% in February. This represented the largest month-over-month increase since May 2021.
Expectations for personal finances and the short-run economic outlook both declined by almost 10% in February, while the long-run economic outlook fell by about 6%.
Trump's recent announcement of global tariffs on steel and aluminum imports, as well as potential additional duties on autos, chips, and pharmaceuticals, have further stoked concerns. Tariffs of 25% on Mexico and Canada are expected next month, while 10% duties on China have already taken effect.
Economists remain cautious, noting that many of Trump's tariff threats have yet to be implemented. The Federal Reserve also expressed concern about inflation, with minutes from its January policy meeting revealing that most Fed officials support maintaining restrictive policy levels.
Despite the concerns, some analysts believe that the inflation fears may be exaggerated. Eugenio Alemán, chief economist at Raymond James, suggests that Trump is using the threat of tariffs as a negotiation tactic. He predicts that once fears subside, inflation expectations will moderate, allowing the Fed to ease rates later this year.