Inflation expectations surge to early 1980s levels despite modest price data
US consumer sentiment deteriorated sharply in early May, dropping to its second-lowest level on record amid surging inflation fears and widespread anxiety over tariff policy, according to the University of Michigan’s preliminary survey released Friday.
The sentiment index fell to 50.8, down from 52.2 in April, missing economists’ expectations and nearing the all-time low of 50 set in June 2022. The latest decline underscores the growing dissonance between actual inflation data and public perception, with consumers increasingly unnerved by the economic consequences of trade tensions.
Tariffs dominate consumer concerns
According to the survey, nearly three-quarters of respondents spontaneously mentioned tariffs—up from 60% the previous month—making it a dominant theme across the political spectrum. The bulk of the survey responses were collected before the May 14 announcement of a 90-day tariff pause between the US and China, which may have softened perceptions too late to shift the overall reading.
“Temporary pauses are unlikely to convince consumers that trade policy has stabilised enough for consumers or businesses to plan effectively for the future,” said Joanne Hsu, director of the survey.
Despite the brief diplomatic breakthrough, consumers appear to remain deeply sceptical about the trajectory of trade policy under President Donald Trump’s administration.
Inflation expectations surge
Short-term inflation expectations soared to 7.3%, the highest level since 1981, up sharply from 6.5% in April and more than double the 3.3% figure recorded just four months ago. Long-run inflation expectations also rose to 4.6%, the highest since 1991.
The uptick in inflation fears comes even as recent government data suggested subdued price growth. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) for April came in below forecasts, and core inflation has remained relatively stable.
Nonetheless, policymakers and markets closely monitor inflation expectations, as they can shape wage negotiations, consumer behaviour, and ultimately monetary policy. Federal Reserve Chair Jerome Powell has said the Fed would be cautious about resuming rate cuts until long-term inflation expectations are clearly under control.
Broader economic pessimism
Beyond inflation and trade, the broader economic mood among consumers has darkened. The survey’s expectations index slipped to 46.5, marking a near 45-year low, while the current conditions index fell to 57.6, down 2.2 points from April.
Americans’ assessments of their personal financial situations also declined, with the sub-index for personal finances hitting its lowest point since 2009. Financial expectations for the year ahead slid to a new record low.
“American households are under rising stress, and this survey captures what is clearly an elevated discontent of the consumer,” said Joe Brusuelas, chief economist at RSM.
Political divide persists
While tariff concerns were cited widely across political affiliations, Republican respondents reported significantly higher overall sentiment than Democrats or independents, reflecting ongoing partisan splits in economic perception.
Despite some positive signals in consumer responses following the May 12 tariff pause, the survey window captured only two days of post-announcement data. The final May sentiment index, due May 30, will be closely watched for signs of recovery.
