Consumer Sentiment Dives Amidst Tariff Uncertainty

The latest University of Michigan consumer sentiment survey has revealed a sharp decline in American consumers' outlook on the economy, with headline sentiment plummeting nearly 10% from January to a reading of 64.7. This significant drop is largely attributed to pessimism over the inflation outlook, as one-year inflation expectations jumped to 4.3% from 3.3% last month.

Pessimism Over Inflation Outlook Drives February's Final Read Lower

The inflation expectations for the next year climbed sharply in February, with the survey showing a significant increase of 1% compared to January's reading. This marked the highest reading since November 2023 and the second consecutive month of "unusually large" increases. Long-run inflation expectations also saw an uptick, rising from 3.2% in January to 3.5% in February - the highest since April 1995.

The Impact of Tariffs on Inflation Expectations

According to Joanne Hsu, director of consumer surveys at the University of Michigan, "What we're seeing is a very broad-based conclusion or opinion among consumers that inflation is going to pick up in the year ahead, as well as the next five years." She added that concerns over policy and tariffs leading to price hikes are driving these expectations. Hsu emphasized that while these expectations may not be cause for panic at this moment, they do signal a growing concern among consumers.

The Role of Tariffs in Shaping Inflation Expectations

President Trump's recent announcements on tariffs have undoubtedly played a significant role in shaping consumer sentiment and inflation expectations. The imposition of 25% tariffs on steel and aluminum imports set to take effect on March 12, as well as the announcement of reciprocal tariffs on trading partners, has created uncertainty among consumers. This uncertainty has led to an increase in long-run inflation expectations, with many consumers anticipating price shocks due to anticipated tariff policies.

Economists Weigh In

Raymond James chief economist Eugenio Alemán disagrees with the notion that concerns about tariffs are justified. He believes that President Trump's use of tariffs as a strategic tool to bring countries to the negotiating table will eventually lead to a decrease in inflation expectations. However, other economists remain cautious, highlighting the potential for geopolitical developments and disruptions to supply chains.

The Federal Reserve's Response

The minutes from the Federal Reserve's January policy meeting revealed that most Fed officials supported holding policy at restrictive levels, emphasizing the need for further progress on inflation before adjusting rates. The report highlighted concerns over upside risks to the inflation outlook, including the potential effects of changes in trade and immigration policy.

Conclusion

The sharp decline in consumer sentiment and increase in inflation expectations serve as a warning sign for policymakers and businesses alike. As tariffs continue to loom large, their impact on inflation expectations will remain a critical area of focus. While economists offer differing opinions on the role of tariffs, one thing is clear: the uncertainty surrounding President Trump's trade policy has created a challenging environment for consumers and businesses alike.

Further Reading

• How to Protect Your Savings Against Inflation
• What Are Tariffs, and How Do They Affect You?
• The Latest Economic News and Indicators