Source: CNBC

Consumer Sentiment Falls in May as Inflation Expectations Rise Amid Trade Tariffs

Recent data reveals that consumer sentiment in the United States has taken a significant hit this May, largely influenced by rising inflation expectations among Americans. According to a University of Michigan survey, the index has dropped to 50.8, down from 52.2 in April — marking its second-lowest reading on record, just behind the figures recorded in June 2022.

Key Findings from the Consumer Sentiment Survey

• Year-ahead inflation expectations increased to 7.3%, compared to 6.5% last month.
• Long-term inflation expectations also rose slightly to 4.6%, up from 4.4%.
• More than three-quarters of respondents mentioned tariffs, a notable rise from nearly 60% in April.

This survey was predominantly conducted prior to the recent announcement of a 90-day pause on tariffs between the United States and China, but the fallout from ongoing trade negotiations remains a dominant concern for U.S. consumers.

Impact of Tariffs on Consumer Perception

Joanne Hsu, the director of the Surveys of Consumers, highlighted that tariffs have become a major focal point for American consumers. The growing uncertainty surrounding trade policies is significantly affecting consumer confidence and their view of the economy. She mentioned, “Tariffs were spontaneously mentioned by nearly three-quarters of consumers, indicating that uncertainty over trade policy continues to dominate consumers’ feelings about the economy.”

Investors and policymakers alike are keeping a close watch on inflation expectations. Federal Reserve Chair Jerome Powell has expressed concern that rising long-term inflation expectations could deter the central bank from making necessary adjustments, such as rate cuts, in response to economic fluctuations caused by tariffs.

The Broader Economic Context

While there is apprehension regarding the potential impact of tariffs on prices, recent inflation data does not suggest an immediate tariff-related spike. Both the consumer price index and the producer price index for April have come in below consensus expectations. Despite this, the current effective tariff rate for goods entering the U.S. remains significantly higher than it was before former President Donald Trump’s administration began in January 2017.

The mixed signals regarding tariffs and inflation have economists divided on the overall impact these levies will have on both short-term and long-term prices. Some experts contend that tariffs may cause a temporary surge in prices, yet the extent of this impact and its potential to instigate long-lasting inflation trends remain under scrutiny.

What’s Next for Consumer Sentiment?

The final consumer sentiment index for May is scheduled for release on May 30 and is expected to be closely monitored to gauge whether the recently announced tariff pause results in a rebound in consumer confidence. As indicated in previous surveys, the trade environment and its associated policies will likely continue to hold significant sway over public sentiment and economic outlooks.

With economic conditions and consumer sentiment interconnected, the coming months will be crucial in determining the direction of U.S. consumer confidence and spending patterns as they navigate the complexities of inflation and trade policy.

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consumer sentiment, inflation expectations, tariffs, economic outlook, U.S. consumers, trade policy, University of Michigan survey, survey results, Federal Reserve, consumer confidence