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Takeaways
- The Michigan Consumer Sentiment Index dropped sharply for the fourth consecutive month, as people became more concerned about inflation and tariffs.
- The survey showed that consumers’ inflation expectations rose again to their highest level in over 30 years, as a series of tariff announcements roiled inflation-weary shoppers.
- Economists say that the Federal Reserve may find it difficult to lower interest rates due to the rising inflation expectations.
According to a widely followed survey conducted on Friday, consumers are feeling depressed and frustrated by the ups-and-downs of President Donald Trump’s tariff policies.
The Michigan Consumer Sentiment Index shows that consumer sentiment declined for the fourth month in a row in April, with a drop of 11% compared to March. The reading was 50.8, which was below the 54.6 that economists surveyed by Dow Jones Newswires or The Wall Street Journal had predicted. This is because a large part of the U.S. populace expressed concerns about the economy.
“Consumers reported multiple warning signs that raised the risk of a recession: expectations for the business conditions, personal finances and incomes, inflation and labor markets, all continued to deteriorate in this month,” said Joanne Hsu. She is the director of the University of Michigan Survey of Consumers.
And that could be bad news for Federal Reserve policymakers, who look at consumer expectations to give them an idea of what's to come.
Trade War Anxieties are Shared Across Demographics
Hsu said that the fear of a trade war was the cause of the anxiety. This is because President Donald Trump had imposed a number new tariffs against foreign trading partners. Some of these were later paused.
The proposals have sparked a variety of responses, ranging from roller-coaster stock market movements to retaliatory duties from China and other trading partner. The report showed it’s causing anxiety to nearly everyone.
Hsu stated that the decline was widespread and univocal, regardless of age, income level, education, geographical region, or political affiliation.
Inflation worries hitting weary consumers
Tariffs are not the primary concern for consumers. Instead, it is inflation. Expectations for price increases in the year ahead have risen to 6.7%. This is almost two percentage point higher than last months. This is the most consumers have felt about inflation in 1981.
Tim Quinlan, a Wells Fargo economist, and Shannon Grein, a Wells Fargo economist, both noted that the rising consumer inflation expectations contradict past historical trends in which people were generally more concerned about rising prices as inflation rates grew. Recent inflation readings, however, show that prices are slowing down, including declines in both consumer and wholesale inflation this week.
Wells Fargo said that consumers are increasingly concerned with the price environment due to the impact of tariffs. “Even though inflation rates have moderated over the last year, consumers today are more price sensitive and less willing to accept price hikes.”
The Fed will have a harder time if inflation expectations are high
Federal Reserve officials could have a problem with elevated inflation concerns. Officials pay attention to consumer expectations about inflation as they can self-fulfill.
While tariffs will likely cause some items to increase in price, the event may only have a limited impact, since inflation measures the price increases compared with similar points in the past, which is usually the previous month and the last year.
“Monetary policymakers may look through a temporary pop in price growth when it comes to setting policy if it feels confident that longer-term inflation expectations are ‘anchored,'” the Wells Fargo note said.
The inflation expectations are poorly anchored when "the public reacts to a short period of higher-than-expected inflation by marking up their long-run expectation considerably," according to former Federal Reserve Chair Ben Bernanke.
The high inflation expectations that have been in place for decades could be a major problem, according to economists.
"We may not have seen price pressures in the official data in March, but the Fed will have to deal with containing or putting a lid on inflation expectations while, at the same time, dealing with slower growth and, perhaps, potential challenges to their independence," wrote BMO Senior Economist Jennifer Lee.
