They brace for rising prices as tariff concerns weigh on economic outlook
American consumers are growing increasingly wary of inflation, with long-term expectations reaching their highest level in nearly three decades.
Consumers anticipate inflation will rise at an annual rate of 3.5% over the next five to 10 years, according to the University of Michigan’s February survey. The current conditions index, which measures how consumers view their financial situation, fell sharply to 65.7 in February from 75.1 in January.
The surge in inflation expectations comes amid concerns that President Donald Trump’s proposed tariffs will drive up consumer prices, further straining household budgets. The inflation outlook has become sharply politicized, with the survey showing that the jump in expectations was almost entirely driven by Democrats, reflecting a growing divide in economic sentiment.
Consumer confidence sinks
Higher inflation expectations coincided with a steep decline in consumer sentiment, which fell to 64.7 in February from 71.7 in January. Analysts had expected a smaller decline, but uncertainty over trade policies appears to be weighing on consumer outlooks.
The survey also revealed that more than half of respondents expect the unemployment rate to rise over the next year, marking the highest level of pessimism since 2020. Buying conditions for major purchases, such as homes, vehicles, and appliances also declined, suggesting that consumers are becoming more hesitant amid concerns over rising prices.
The decline in sentiment partially reverses the post-election confidence boost seen in November, when Trump’s victory initially drove optimism among Republicans. However, growing fears of a trade war appear to be dampening economic confidence across party lines.
The housing market is already showing signs of strain. Existing-home sales dropped in January for the first time since September, reflecting the pressure of high mortgage rates and elevated home prices. The spring buying season now faces a challenging environment, with affordability concerns likely to weigh on demand.
Meanwhile, business activity slowed in February, driven by weakness in the service sector.
Tougher Fed policy
The growing anxiety over inflation may complicate Federal Reserve policy decisions in the months ahead. While Fed chair Jerome Powell and other policymakers have signaled they are in no rush to cut interest rates, rising inflation expectations could reinforce the case for keeping rates higher for longer.
Short-term inflation expectations for the next 12 months climbed to 4.3%, raising concerns that inflation could remain stubbornly elevated.
“You can bet that Chairman Powell and company will take note of that, and that this further seals the case for the Fed remaining on hold for a while,” said Stephen Stanley, chief US economist at Santander US Capital Markets LLC. “The question is whether President Trump and the Administration are paying attention to the souring of consumer moods due to the threat of tariffs.”
Read next: Fed's Bowman slams 'opacity and inaction' in bank oversight
St. Louis Fed President Alberto Musalem suggested that while temporary price spikes caused by tariffs may not trigger an immediate policy shift, a sustained rise in inflation expectations could force the Fed to take action.
“It could be appropriate to ignore, or ‘look through’, an increase in the price level if the impact on inflation is expected to be brief and limited,” he said. “However, a different monetary policy response could be appropriate if higher inflation is sustained, or longer-term inflation expectations rise.”
The University of Michigan report also raised concerns about inflation becoming self-fulfilling, as consumers may start spending more now to get ahead of future price hikes.
“If consumers continue to ramp up their spending to avoid large anticipated price increases, higher inflation expectations could become self-fulfilling,” said Joanne Hsu, director of the survey.
Economists are also adjusting their outlooks, with a Bloomberg survey showing an upward revision in forecasts for the Fed’s preferred inflation measure in the first quarter.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
