Dive Brief:
- Consumer sentiment slumped this month and inflation expectations surged on fears that Trump administration tariffs will fuel inflation, according to the University of Michigan’s consumer survey released Friday.
- “Consumers’ expectations for the path of inflation worsened considerably this month — they are clearly bracing for a resurgence in inflation,” Joanne Hsu, director of the university’s survey, said in a statement. “Consumers broadly anticipate that tariff hikes will lead to higher inflation, but policy uncertainty means that their views are subject to change.”
- All five components of the sentiment index fell in February, led by a 19% plunge in buying conditions for durable goods that was prompted “in part to fears that tariff-induced price increases are imminent,” Hsu said.
Dive Insight:
The Federal Reserve on Jan. 29 held the benchmark interest rate steady amid concerns that Trump administration plans for tariffs, deregulation, mass deportations and tax cuts may spur inflation in coming months. At the same time, Fed officials have said for several weeks that they deem inflation expectations stable.
“Longer-term inflation expectations, typically a guide to future inflation, are mostly at healthy levels,” Atlanta Fed President Raphael Bostic said in a report Thursday.
Bostic noted that in December, for the first time in four years, respondents to the Atlanta Fed Business Inflation Expectations survey said they expect unit costs to rise on average just 2% during the following 12 months.
Consumers currently are much less optimistic, the University of Michigan found in its survey. Long-run inflation expectations rose to 3.5% this month from 3.2% in January.
Roughly 40% of consumers spontaneously cited the impact from tariffs this month, compared with 27% in January and less than 2% prior to the November presidential election, Hsu said.
Sentiment among U.S. businesses also plunged this month, hitting a 17-month low, S&P Global said Friday, citing its Flash U.S. PMI Composite Output Index.
“The upbeat mood seen among U.S. businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.
“Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments,” Williamson said. “Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.”
The survey, which indicated late last year that the U.S. economy would expand more than 2% in 2025, now signals just 0.6% growth for the year, Williamson said.
The New York Fed’s Empire State Manufacturing Survey also highlighted flagging confidence and greater inflation risk.
“Input price increases picked up to the fastest pace in nearly two years, and optimism about the outlook dropped noticeably,” Richard Deitz, an economic research adviser at the New York Fed, said in a statement. The district bank conducted the survey from Feb. 3 through Feb. 11.