Americans Fear Faster Inflation on the Horizon
The Rise in Inflation Expectations and Declining Consumer Sentiment
Americans are increasingly worried that inflation is set to accelerate in the coming year. According to the University of Michigan’s latest consumer survey, released on Friday, the public’s expectations for inflation over the next year jumped to 4.3% in February, marking a significant increase of one full percentage point from January. This surge represents the highest level of inflation expectations since November 2023 and is only the fifth time in 14 years that such a large one-month rise (of one percentage point or more) has been observed. Joanne Hsu, the survey’s director, highlighted the significance of this increase, noting that it reflects growing consumer concerns about rising prices.
Alongside the rise in inflation expectations, the survey also revealed a decline in consumer sentiment for the second consecutive month. The sentiment index fell by 5% in February compared to January, reaching its lowest level since July 2024. This decline was widespread, with Republicans, Independents, and Democrats alike expressing less optimism, as well as consumers across different age and wealth groups. Hsu emphasized that the decrease in sentiment was pervasive, suggesting broad-based unease among Americans about the economic outlook.
The Impact of Trade Policies on Consumer Confidence
The timing of the Michigan survey’s findings is noteworthy, as the interviews were concluded on February 4, just days after the Trump administration announced 25% tariffs on Mexico and Canada. Although the three countries later reached a deal to delay the tariffs for 30 days, the initial announcement appears to have heightened concerns among consumers and businesses about the potential for higher costs in the future. Meanwhile, an additional 10% duty on Chinese goods, which went into effect on February 20, was met with immediate retaliation from China, further complicating the trade landscape and likely contributing to inflation fears.
Economists have pointed out that the imposition of tariffs and the resulting trade disputes could have a direct impact on inflation. Christopher Rupkey, chief economist at FwdBonds, noted in an analyst note that the consumer sent a “warning shot” to the Trump administration, signaling that the imposition of import tariffs could boost inflation by more than a percentage point this year. Rupkey also observed that consumers are increasingly confident that the pro-growth policies of the Trump administration, particularly its trade measures, are inflationary in nature.
The Self-Fulfilling Nature of Inflation Expectations
The Federal Reserve, which is tasked with managing interest rates, closely monitors Americans’ perception of inflation and their expectations for future price increases. This is because inflation expectations can sometimes be self-fulfilling; if consumers believe that prices will rise in the future, they may adjust their spending behavior accordingly, potentially driving inflation higher. For example, if people anticipate higher prices, they may accelerate purchases now, which can lead to increased demand and, in turn, higher prices.
The Fed places particular emphasis on long-term inflation expectations, as these are seen as more stable and less susceptible to short-term fluctuations. While the year-ahead inflation expectations in the Michigan survey rose sharply to 4.3%, the long-term expectations edged up only slightly to 3.3% from January’s 3.2%. Despite this, the long-term figure remains “elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic,” according to the survey. This suggests that Americans are becoming increasingly pessimistic about the inflation outlook, even over the longer term.
The Federal Reserve’s Response to Inflation Fears
The Federal Reserve has a history of responding to shifts in inflation expectations. In 2018, when the Trump administration first imposed tariffs on various goods, Fed economists conducted simulations to determine the appropriate path for monetary policy under different tariff scenarios. In situations where inflation expectations rose significantly, the Fed concluded that it would be appropriate to raise interest rates to counteract the potential inflationary pressures.
More recently, the Fed paused its rate-cutting cycle last month after slashing its key interest rates by a full percentage point over three meetings in 2023. Fed officials have signaled a desire to exercise caution with further rate cuts, as they closely monitor the economic data for signs of inflationary pressures. Wall Street futures currently do not anticipate a rate cut in March, reflecting expectations that the Fed will maintain its current policy stance.
The Broader Implications for the Economy and Consumers
The combination of rising inflation expectations and declining consumer sentiment has significant implications for the economy. If consumers become more cautious in their spending due to fears of higher prices, it could slow down economic growth. At the same time, businesses may face increased costs due to tariffs and supply chain disruptions, potentially leading to higher prices for goods and services.
The timing of these developments is particularly concerning, as the economy is still navigating the aftermath of the pandemic and ongoing geopolitical tensions. The imposition of tariffs and the resulting trade disputes have added a layer of uncertainty, making it difficult for consumers and businesses to plan for the future. As the Federal Reserve weighs its next moves, it will need to carefully balance the risks of inflation with the need to support economic growth.
Ultimately, the rising inflation expectations and declining consumer sentiment highlighted in the Michigan survey serve as a reminder of the complex interplay between policy decisions, economic conditions, and consumer behavior. As the situation continues to evolve, Americans will be keeping a close eye on how these factors shape the economic landscape in the months to come.
