WASHINGTON: US consumer sentiment dropped to its lowest point in nearly two and a half years in March, while inflation expectations surged, driven by concerns over President Donald Trump’s sweeping tariffs. These tariffs, which have ignited a trade war, are feared to raise prices and undermine the economy.
The deterioration in sentiment and inflation expectations, reported by the University of Michigan Surveys of Consumers on Friday, was observed across all political party affiliations. Consumers highlighted that “frequent gyrations in economic policies make it very difficult for consumers to plan for the future.”
These worries echo sentiments in various business surveys. The uncertainty caused by Trump’s fluctuating tariffs and the escalation of trade tensions threatens to derail economic expansion. Fears of higher prices, which pushed consumers’ long-term inflation expectations to levels last seen in early 1993, create a challenge for Federal Reserve officials as they consider future monetary policy actions.
“The jury is back, and the verdict is in. Trump’s policies are harming the economy and America’s future prosperity,” said Christopher Rupkey, chief economist at FWDBONDS. “Consumers are frightened and foresee sharply higher prices despite assurances from Washington that trade tariffs are good for the economy.”
The University of Michigan’s Consumer Sentiment Index fell to 57.9, its lowest level since November 2022, down from a final reading of 64.7 in February. Economists polled by Reuters had forecast a decline to 63.1. The index has now erased all the gains posted following Trump’s election victory in November.
This month’s sentiment weakness reflected worsening expectations for the future across several aspects of the economy, including personal finances, employment, inflation, business conditions, and the stock market.
Republicans saw a 10 per cent drop in their expectations index, while Independents recorded a 12 per cent decrease. Democrats experienced the steepest decline, with a 24 per cent tumble in expectations.
“Consumers from all three political affiliations agree that the outlook has worsened since February,” said Joanne Hsu, Director of the Surveys of Consumers.
Trump has imposed tariffs on a wide range of goods from key trade partners such as Canada, China, and the European Union, which have responded with their own retaliatory measures. Some tariffs have been imposed and then suspended for a month.
On Thursday, Trump threatened to impose a 200 per cent tariff on wine, cognac, and other alcohol imports from Europe. This tariff whiplash and the escalation in the trade war have rattled financial markets, triggering a selloff on the stock market, which also contributed to the decline in consumer sentiment this month.
Forty-eight per cent of the survey’s respondents mentioned tariffs and expected them to drive up prices in the future. Consumers’ 12-month inflation expectations rose to 4.9 per cent, the highest since November 2022, up from 4.3 per cent in February. This marks three consecutive months of increases of 0.5 percentage points or more, spanning all three political affiliations.
Over the next five years, consumers expect inflation to run at 3.9 per cent, the highest reading since February 1993, compared to 3.5 per cent in February. There was a significant increase in inflation expectations among Independents, while expectations also rose among Democrats and Republicans.
“Unlike during the pandemic, when consumers largely understood price spikes to be short-lived, the data now increasingly show that consumers see today’s price pressures as longer-lasting,” said Tim Quinlan, a senior economist at Wells Fargo.
Stocks on Wall Street rebounded after earlier declines, while the dollar remained steady against a basket of currencies, and US Treasury yields rose.
Federal Reserve officials meeting next week are expected to keep the US central bank’s benchmark overnight interest rate in the 4.25-4.50 per cent range, having reduced it by 100 basis points since September. They will continue assessing the economic impact of the Trump administration’s policies. Financial markets expect the Fed to resume cutting borrowing costs in June after pausing its easing cycle in January amid a darker economic outlook.
Economists noted that it would be difficult for policymakers to overlook the persistent rise in inflation expectations.
“Fed officials have argued that as long as inflation expectations remain anchored, tariffs can probably be viewed as having a one-off impact on prices rather than becoming part of an inflationary process,” said Conrad DeQuadros, senior economic advisor at Brean Capital. “But this view seems increasingly less credible based on these data.”
The Federal Reserve raised the policy rate by 5.25 percentage points in 2022 and 2023 to combat inflation.
Consumers are also feeling pressure from an unprecedented effort to drastically reduce the size of government, led by tech billionaire Elon Musk’s Department of Government Efficiency (DOGE), created by Trump. This department has slashed funding and fired thousands of federal workers, although some have been reinstated following legal challenges. Agencies had until Thursday to submit plans for large-scale layoffs.
A Reuters/Ipsos poll conducted on March 11-12 revealed that 57 per cent of Americans believe Trump’s economic policies are too erratic, while 53 per cent think the tariff war will do more harm than good.
While consumer sentiment and spending have historically shown a weak correlation, economists warn that the severity of the drop in morale is worrying.
“The decline in confidence is becoming a serious threat to consumer spending,” said Bill Adams, chief economist at Comerica Bank. “People who fear the economy is headed into trouble are unlikely to buy new cars, homes, or spend on dining out or vacations.”
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