Prime Highlights:
February’s University of Michigan survey shows consumers expect inflation to reach 4.3% in a year, a 1 percentage point increase from January and the highest since November 2023.
The headline consumer sentiment index dropped to 67.8, reflecting a 4.6% decrease from January and an 11.8% decline from February 2024.
Key Background:
Consumer inflation expectations spiked in February, as concerns over potential price increases due to tariffs escalated, dampening overall sentiment. According to the University of Michigan’s consumer survey, respondents now anticipate an inflation rate of 4.3% one year from now, marking a 1 percentage point increase from January and the highest level since November 2023.
The surge in inflation expectations coincided with broader declines in consumer optimism, as the survey’s headline index fell to 67.8, a 4.6% decrease from January and an 11.8% drop from the same month in 2024. The survey period, which spanned from January 21 to February 3, captured reactions to U.S. President Donald Trump’s tariffs on major trading partners. While a temporary delay was reached for tariffs on Mexico, the looming threat of price pass-throughs from these trade policies contributed to heightened inflation concerns.
Joanne Hsu, the director of the survey, highlighted that this marked only the fifth time in the last 14 years that inflation expectations had risen by 1 percentage point or more in a single month. Despite this short-term surge in concerns, longer-term expectations showed a slight increase, with the five-year inflation outlook rising to 3.3%, a modest gain of 0.1 percentage point.
The decline in consumer sentiment was widespread, affecting individuals across political affiliations, age groups, and income levels. According to Hsu, the overall drop in sentiment reflects concerns that the negative impacts of tariff policies may already be unavoidable. The survey revealed that worries about rising prices were particularly acute in sectors like food, shelter, and transportation, which are major pain points for many families. The report had an immediate impact on financial markets, with stocks, including the Dow Jones Industrial Average, declining in response. Economists noted that the weight of inflation continues to strain family budgets, especially for lower-income households, making even small price increases difficult to bear.
