According to the University of Michigan’s most recent consumer sentiment survey, long-run consumer inflation expectations have taken a significant downturn. This change is a sign that attitudes are evolving towards tariff-driven price increases. Joanne Hsu, who directed the survey, explains that Americans’ most dire predictions about inflation from tariffs never materialized. This shift reflects the transition towards a more sustainable economic trajectory.
Back in December, former President Donald Trump was still forecasting inflation in the range of 2.8% and 3%. Recent data showed a steep decline in the one-year inflation expectation. It has now dropped to 4.4%, a decline from 5% in June and far below the peak of 6.6% in May, the highest rate since late 1981. This marks a significant turn in consumer sentiment and the third straight month of declining expectations.
The expectations reading from the survey fell by 14.8% from July 2024, indicating that consumers are becoming less concerned about future inflation. No surprise then that the current conditions index soared by 6.5%. This jump indicates that respondents are experiencing an improved economic outlook.
Joanne Hsu commented on the findings, stating, “Both readings are the lowest since February 2025 but remain above December 2024, indicating that consumers still perceive substantial risk that inflation will increase in the future.”
On balance, even the one- and five-year inflation outlooks have crashed relative to past outturns. The five-year outlook dropped to 3.6%, a 0.4 percentage point decline from June. Even with this decline, these numbers are still under the long-term average, which continues to indicate a lack of confidence among consumers.
The headline sentiment index is down 6.9% from a year ago. It has dropped 16% since last December, underscoring a slide in consumer confidence that started when Donald Trump was sworn into office in January.
The survey results show an extremely difficult economic environment. Inflation with inflation, the fears are still there, but not to the degree we were once expressing panic about. Consumers are already struggling with the effects of these tariffs and other inflationary forces on their wallets. Consumer and business sentiment their expectations will play an outsized role in determining overall economic sentiment in the process.