Consumer Sentiment Takes a Hit as Inflation Expectations Reach 6.5%

The final reading of the University of Michigan's consumer sentiment survey revealed a stark decline in consumer confidence, with pessimism over inflation expectations soaring to its highest level since 1981 in April. The survey showed that one-year inflation expectations jumped from 5% in March to 6.5%, marking a significant increase in consumer concern about rising costs.

This surge in inflation expectations comes after President Trump's 90-day tariff pause on April 9, which had provided some temporary relief to consumers. However, the announcement appears to have only delayed the inevitable, as consumers remain anxious about the impact of trade policy uncertainty on their purchasing power and economic prospects. The updated survey suggests that consumers' expectations for inflation are now back on track, with one-year projections exceeding 6% after Trump's tariff pause.

The University of Michigan's Surveys of Consumers director, Joanne Hsu, noted that "inflation expectations evolved with major trade policy announcements this month." According to Hsu, the partial pause in tariff increases led to a slight decrease in inflation expectations, but they remained substantially elevated relative to March. This volatility in consumer sentiment highlights the growing concern among economists and policymakers about the impact of trade uncertainty on economic growth.

Consumer Sentiment Index Falls to 52.2

The consumer sentiment index, which had fallen to a reading of 50.8 in April's initial reading, showed a modest rebound in Friday's final reading, ending at 52.2. This marked the fourth consecutive month that sentiment has declined, with the index now down by 32% since January and remaining at one of the lowest levels seen since 1978.

The ongoing uncertainty surrounding trade policy continues to weigh heavily on consumers' minds, as Hsu pointed out that "labor market expectations remained bleak." The survey also revealed that consumers anticipated weaker income growth for themselves in the year ahead. Without reliably strong incomes, spending is unlikely to remain robust amid the numerous warning signs perceived by consumers.

Weak Data from April Highlights Ongoing Economic Concerns

The University of Michigan's consumer sentiment survey follows a string of weak data from April. A new report from S&P Global showed that its flash composite PMI output index fell to 51.2 in April, hitting its lowest level in 16 months. This decline highlights the continued weakness in economic activity, with consumers and businesses expressing growing concerns about the sustainability of growth.

Regional Federal Reserve surveys have also flashed warning signs. The Richmond Federal Reserve's survey of manufacturing activity revealed that the composite manufacturing index fell to -13 in April, down from -4. New orders in the month also declined to a reading of -15, well below the -4 seen in March. Meanwhile, the Philadelphia Federal Reserve's nonmanufacturing business outlook survey tumbled to a reading of -42.7, its lowest reading since May 2020.

Growing Concerns about Economic Growth

The recent rush of weak survey data has raised concerns among economists and policymakers that economic growth may eventually decline. The St. Louis Federal Reserve highlighted in an April 7 report that the recent spike in economic policy uncertainty "could lead to recession conditions." Powell noted this week, referencing the St. Louis Fed's work, that "businesses and households are saying in surveys that they are experiencing incredibly high uncertainty."

This uncertainty is leading to a slowdown in decision-making, with research from the Fed showing that it can ultimately result in a decline in economic growth data. As American consumers remain concerned about rising inflation amid an ongoing trade war, policymakers face increasing pressure to address these concerns and provide greater clarity on their policy intentions.

Conclusion

The consumer sentiment survey highlights the growing concern among consumers about rising inflation expectations. The ongoing uncertainty surrounding trade policy continues to weigh heavily on consumers' minds, with labor market expectations remaining bleak and income growth anticipated to be weaker in the year ahead. As policymakers continue to grapple with these concerns, they must prioritize providing greater clarity on their policy intentions and addressing the growing uncertainty surrounding economic growth.