Consumers Eye Inflationary Concerns as Trump's Trade Policy Roils Sentiment

American consumers' economic outlook dimmed in February, with uncertainty surrounding President Trump's trade policies fueling a surge in inflation expectations for the second consecutive month.

The University of Michigan's Consumer Sentiment Index, released Friday, showed a 10% decline from January to 64.7, extending an early-month dip. Pessimism over inflation drove February's lower reading, with one-year inflation expectations jumping to 4.3% from 3.3% in January.

This marks the highest inflation expectations since November 2023 and the second consecutive month of "unusually large" increases, according to the university. Joanne Hsu, director of consumer surveys at the university, attributed the shift to widespread concerns over inflation in the near and long term.

Long-run inflation expectations, tracking the next five to 10 years, also climbed from 3.2% in January to 3.5% in February, the largest month-over-month increase since May 2021. Hsu noted that such a significant rise was last recorded in 2008, when consumers reacted to current price shocks.

"This time it's completely different. People are not reacting to current price shocks. They're reacting to anticipated price shocks," Hsu said. The impact of these expectations remains uncertain, depending on the implementation of tariff policies and their potential impact on consumer prices.

Both personal finances and short-term economic outlook expectations dropped by nearly 10% in February, while long-term economic outlook fell by 6%, its lowest since November 2023. The declines coincide with Trump's recent announcement of tariffs on steel and aluminum imports, as well as his threat of additional duties on autos, chips, and pharmaceuticals.

Economists remain cautious, as many of Trump's tariff threats have yet to be implemented. Raymond James chief economist Eugenio Alemán believes that concerns about tariffs may be exaggerated, with Trump potentially using them as a negotiating tactic. He predicts that inflation expectations will subside and allow the Fed to ease rates later this year.

Federal Reserve minutes from January revealed that most Fed officials favored maintaining restrictive policy levels and emphasized the need for further inflation progress before adjusting rates. The minutes noted concerns over potential trade and immigration policy changes and geopolitical developments that could disrupt supply chains.