The University of Michigan's latest consumer survey reveals a sharp decline in confidence across all components, alongside a significant rise in inflation expectations. This survey indicates inflation expectations have surged to 4.3% in the short term and 3.3% over the longer term, marking the highest levels since June 2008. These findings come amid a backdrop of global trade tensions and domestic economic policy shifts, with many economists expressing concerns over the potential implications for future monetary policy.
In contrast, the New York Federal Reserve's report, which surveyed a smaller sample of 1,300 respondents, presents a more subdued outlook on inflation. The NY Fed's survey, not designed to guide foreign exchange trading, indicates that median inflation expectations remain steady at 3.0% for both one- and three-year horizons. This stability contrasts with the heightened anticipation of price increases reflected in other data.
"Median inflation expectations were unchanged at 3.0% at both the one- and three-year-ahead horizons. Median five-year-ahead inflation expectations rose by 0.3 percentage point to 3.0% in January." – NY Fed
The divergence in these economic indicators underscores the complexity of forecasting inflation trends. A majority of respondents, according to another survey, anticipate inflation will escalate by the end of June, with a smaller fraction predicting increases in March or during the second quarter. This uncertainty is compounded by ongoing trade disputes initiated by the Trump administration, which have added layers of unpredictability to the global economic landscape.
“The President even floated the idea of selectively not making some debt payments last night, although that may have been walked back by functioning adults within the administration later.” – Canada
The steel and aluminum tariffs announced to take effect on March 12 have sparked concerns among market analysts, providing a window for markets to react to potential disruptions. Economists, surveyed by Reuters, largely foresee a Federal Reserve hesitant to cut rates amidst this tariff-induced chaos. This cautious stance aligns with broader market sentiments favoring the U.S. dollar, albeit acknowledging that market movements rarely follow a straightforward path.
The Conference Board, with its broader sample size of 3,500 respondents, further enriches the data landscape, complementing insights from smaller surveys like those from the University of Michigan and NY Fed. This diversity in data sources highlights the multifaceted nature of public sentiment towards economic conditions.
“Any hint of the selective suspension of congressionally authorized payments will be a breach of trust and ultimately, a form of default. And our credibility, once lost, will prove difficult to regain.” – Five TreasSecs (NYT op-ed)
Economic analysts also weigh in on the political dimensions influencing market forecasts. According to Authers at Bloomberg, partisan perspectives vary dramatically, with Republicans generally expecting zero inflation over the next year, while Democrats brace for price hikes exceeding 5%. This disparity illustrates the deep political divides shaping economic expectations.
“The average Republican thinks inflation will be zero over the next 12 months, while the average Democrat is braced for price rises of more than 5%.” – Authers at Bloomberg
Should inflation indeed rise as Democrats predict, it could pose significant challenges to the Trump administration's economic agenda. Conversely, if inflation remains subdued or declines—a scenario Authers considers unlikely—this would represent a notable political achievement for the current administration.
“For the record, there is no way inflation is going to drop to zero next year. If headline CPI just drops below 2%, that will be a massive political victory for the administration — and that also seems unlikely. If Democrats are right that CPI is heading straight back up above 5%, that would imply that the Trump political project will soon be dead (it surely couldn’t withstand that). It can safely be labeled wishful thinking.” – Authers at Bloomberg
Amid these economic projections, the U.S. deficit remains a pressing concern. Last year's deficit reached 6.4% of GDP, surpassing Europe's guideline of 3%. Reducing this shortfall could potentially lower bond yields and stimulate investment-led growth—a goal that policymakers continue to grapple with.
“The US deficit was 6.4% of GDP last year, compared with Europe’s 3% guideline. Reducing the shortfall could bring down bond yields, stoking investment-led growth.” – Authers at Bloomberg
The global ramifications of these domestic policies are still unfolding. The International Monetary Fund (IMF) has indicated that it is too early to assess the full impact of President Trump's trade war on global markets. However, there is broad consensus among economists that these trade tensions introduce significant uncertainty into long-term economic planning.
As markets prepare for the implementation of steel and aluminum tariffs in March, attention turns to potential market responses and adjustments. The U.S. Treasury market, valued at approximately $28.3 trillion by year-end, serves as a barometer for investor confidence and policy impact.