US Consumer Outlook Dims as Inflation Expectations Soar Amid Trade Uncertainty

Key Takeaways:

* Consumer sentiment declined in February due to inflation concerns.
* One-year inflation expectations jumped to 4.3%, the highest since November 2023.
* Long-run inflation expectations climbed to 3.5%, the highest since April 1995.
* Uncertainty over Trump's trade policies is driving the surge in inflation expectations.
* Tariffs on steel, aluminum, and other imports have contributed to these concerns.

Consumer Sentiment Survey

The University of Michigan's consumer sentiment survey revealed a drop in sentiment in February, continuing a trend from January. Inflation expectations played a significant role in the decline, with one-year expectations surging to 4.3%. This represents a substantial increase from the 3.3% recorded in January.

Long-run inflation expectations also rose, reaching 3.5% in February, the highest since April 1995. This increase marks two consecutive months of "unusually large" increases. Consumers anticipate inflation to pick up in the coming year and the next five years.

Impact of Trade Policies

Uncertainty surrounding Trump's trade policies is a primary driver of inflation expectations. Consumers are concerned that tariffs on imports will lead to price hikes. The announcement of global tariffs on steel and aluminum, as well as potential tariffs on autos and other goods, has exacerbated these concerns.

Economists' Perspective

Economists are adopting a cautious approach, as most of Trump's tariff threats have yet to be implemented. Some experts believe that concerns about tariffs may be overstated, and that inflation expectations will subside if fears diminish. However, others view the situation as a potential obstacle for the Federal Reserve's interest rate-lowering campaign.

Federal Reserve Policy

The Federal Reserve is closely monitoring inflation expectations. Minutes from the January policy meeting indicated that officials were concerned about upside risks to inflation, including potential impacts from trade policy changes. The Fed has signaled that further progress on inflation is needed before adjusting interest rates.

Conclusion

American consumers are facing a dimming economic outlook as inflation expectations continue to rise. Uncertainty over Trump's trade policies is a significant factor in this shift in sentiment. Economists are closely watching the situation, as it could potentially impact Federal Reserve policy decisions.