Consumers' Economic Outlook Dims Amidst Inflation Concerns
The University of Michigan's latest consumer sentiment survey reveals a pessimistic outlook among American consumers, with a nearly 10% decline in sentiment from January to 64.7 in February. This downtrend is primarily driven by rising inflation expectations, which have escalated to 4.3% for the next year and 3.5% over the next five to 10 years. These mark the highest readings since November 2023 and April 1995, respectively.
Joanne Hsu, director of consumer surveys at the University of Michigan, attributes the surge in inflation expectations to concerns over Trump's trade policies. She states that consumers anticipate tariffs to lead to price hikes, which is reflected in the "unusually large" increases seen in the past two months. Long-run inflation expectations have also witnessed the largest month-over-month increase since May 2021.
Personal finances and economic outlook predictions have also declined by almost 10% in February, while long-run economic outlook has fallen to its lowest point since November 2023. Trump's announcement of global tariffs on steel and aluminum imports, as well as potential reciprocal tariffs, has further fueled uncertainty. Tariffs of 25% on Mexico and Canada are imminent, and duties on China are already in effect.
Despite the concerns, economists generally maintain a wait-and-see approach, as most of Trump's tariff threats have yet to be implemented. Raymond James chief economist, Eugenio Alemán, suggests that the threat of tariffs is a negotiating tactic. Once tariff concerns subside, inflation expectations may moderate, allowing the Federal Reserve to potentially ease rates later this year.
Nonetheless, the inflation expectations remain a concern for the Federal Reserve. In the minutes from the January policy meeting, officials acknowledged upside risks to the inflation outlook, citing trade and immigration policy changes, geopolitical disruptions, and strong household spending as potential contributing factors.