That’s led to a solid consumer sentiment rebound as inflation expectations fall, by all accounts at least based on the University of Michigan’s index. Just last week, the Federal Reserve of New York recorded the largest decline ever recorded in the one-year inflation expectation. In May, it dropped to 3.2%, a drop of 0.4 percentage points from April. If realized, this would be a significant turnaround in the consumer mindset — especially as inflationary concerns seem to be subsiding.
Ergo, the one-year estimate of inflation has fallen to 5.1%. This is a momentous drop, down 1.5 percentage points, down to levels we have not seen since 1981. The five-year forwards on inflation slipped to 4.1%, -0.1pp. For one, inflation expectations remain elevated compared to where they were in the second half of 2024. This indicates that consumers are still on high alert for inflation.
Concerns over tariffs have been a drag on consumer sentiment. Fears abated after President Donald Trump made it clear he would ease up on international trade threats. A University of Michigan survey released Friday showed consumer pessimism about the state of the economy is abating. They see less risk to the upside from a sudden outbreak of inflation.
Joanne Hsu, the survey director, noted significant changes in consumer sentiment:
“Consumers appear to have settled somewhat from the shock of the extremely high tariffs announced in April and the policy volatility seen in the weeks that followed.”
Hsu’s remarks reflect a meaningful change in consumer sentiment about the state of the economy, generally. Current conditions measure of the survey spiked 8.1% and future expectations shot up by an eye-popping 21.9%. Even with this optimism, all sentiment indexes are still well below their readings from a year ago, reflecting persistent worries about the economy.
While consumers’ fears regarding tariffs have softened somewhat, as Hsu stated, “Consumers’ fears about the potential impact of tariffs on future inflation have softened somewhat in June,” economists remain vigilant. They say they expect tariffs to weigh heavily on prices in the months ahead.
FMC Market analysts see no change in interest rate until September at the earliest. For these reasons, they think the balance of risks is heavily tilted toward leaving rates unchanged. The tug of war between consumer sentiment and inflation expectations will be the key to watch for policymakers in the going forward.