Market analysts pay attention to the Michigan survey on inflation expectations. Historically, consumers have proven fairly accurate in predicting the actual inflation rate, Hsu said. Only 14 percent of respondents said their incomes went up more than prices, 33 percent said their incomes went up about the same as prices, and 53 percent said their incomes went up less than prices.

Tracking consumer sentiment versus how consumers are doing based on verified retail purchases

Every month, the University of Michigan’s Surveys of Consumers asks Americans to predict the rate of inflation over the next year. As recently as December, consumers expected an annual inflation rate of 2.8%. The survey figure rose to 4.3% in February, 5% in March and 6.7% in April, based on preliminary data. In this note, we summarize our observations from an economic sentiment survey linking panelists’ responses to verified purchases. Consumer sentiment deteriorated since 2019, but spending remained strong even among those who felt they were doing much worse or experienced income losses as of 2024. This disconnect between what consumers have been saying and doing suggests that consumer sentiment surveys on their own have become weaker indicators of future consumer behavior and of the health of US consumers.

Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are thrown out or trimmed. The inflation rate is then calculated as a weighted average of the remaining components. The resulting inflation measure has been shown to outperform the more conventional “excluding food and energy” measure as a gauge of core inflation.

The Michigan survey comes as the financial industry is growing more concerned about inflation. Just last month, the Federal Reserve forecast its preferred inflation measure would rise to 2.7% by year’s end. Less than half of consumers expect their own incomes to grow in the year ahead, down from nearly 60% half a year ago. About 67% of consumers expect that the purchasing power of their incomes will be eroded over the next year, up from 59% in October 2024. The survey comes amid concerns that President Donald Trump’s tariffs will raise inflation and slow growth, with some prominent Wall Street executives and economists expecting the U.S. could teeter on recession over the next year. Typically, falling sentiment suggests that Americans will cut back on spending, though in recent years consumers have at times kept spending despite the gloom.

The consumer confidence measures were devised in the late 1940s by Professor George Katona at the University of Michigan. They have now developed into an ongoing, nationally representative survey based on telephonic household interviews. The Index of Consumer Expectations (a sub-index of ICS) is included in the Leading Indicator Composite Index published by the U.S. Respondents could enter approximate numbers for current and 2019 income levels, or skip these questions to provide a rough estimate in percent changes of how much their household income changed between 2019 and 2024.

Consumers worried about labor markets amid trade policy volatility

“In our models, they foreshadow economic contraction ahead and a recession will give the Fed something to think about.” The share of respondents expecting unemployment to rise in the coming months increased for the fifth straight month and is now the highest since 2009, during the Great Recession. The last time inflation expectations ran that high was in 1981, toward the end of a historic period of high prices, remembered by the Federal Reserve as The Great Inflation. But as the right panel of Figure 6 shows, respondents who said they took on additional jobs or now regularly work more hours per week were more likely to say they were doing worse. The Consumer Sentiment Index gives a glimpse as to how consumers are feeling about spending and their future expectations for the economy.

The analysts warn of consumer spending “increasingly restrained by caution under the Trump economic agenda.” And Americans now expect long-term inflation to reach 4.4%, up from 4.1% last month, a move that may be of particular concern for the U.S. While the April decline in current conditions was relatively modest, the expectations index plummeted with drop-offs in personal finances as well as business conditions, said economist Joanne Hsu, director of the University of Michigan’s Surveys of Consumers.

• This situation similarly occurred during the inflationary episodes of the 1970s and early 1980s.
• But people are not only spending more – we adjust for inflation – they are buying and consuming more in 2024 compared with 2019.
• More recently, sentiment has been moving closely with sentiment regarding price levels.

Consumer inflation fears reach highest mark since 1981

This situation similarly occurred during the inflationary episodes of the 1970s and early 1980s. Most respondents felt their annual income did not keep up with their spending but recall that consumers tend to over-estimate the extent of retail price inflation they experienced. Only 23 percent of respondents reported that their incomes grew at the same rate or faster than their spending. The more consumers said their income did not keep up with spending, the greater the share who said they were doing worse or much worse in today’s economy compared with 2019.

“Keeping legacyfx review inflation expectations anchored is critical for the Fed and one reason we don’t anticipate the central bank cutting interest rates until December.” The Fed pays close attention to inflation expectations, because they can become self-fulfilling. If people expect prices to rise, they often take steps that can push up prices, such as accelerating purchases or seeking higher wages. In another consumer confidence survey, from The Conference Board in March, Americans said they expect prices to rise by 5.1% in the next year.

• This week, by contrast, the investment firm Vanguard predicted prices will rise nearly 4% in 2025.
• While it is important to recognize how consumers feel, we should exercise caution when using consumer sentiment surveys to infer future consumer behavior given this recent disconnect between what consumers say and do.
• “I think there’s a great optimism in this economy,” said White House press secretary Karoline Leavitt, when asked about consumer survey.
• American consumers expect prices to rise by 6.7% over the next year, according to a closely watched survey of consumer sentiment from the University of Michigan.

The Current Index fell to 59.8, down from 63.8 in March and below last April’s 79.0. The Expectations Index fell to 47.3, down from 52.6 in March and below last April’s 76.0. This month’s figure includes the 59% of Independents and 44% of Republicans who referenced tariffs, bitbuy review showing that these tariff concerns are widespread and span the political spectrum, Hsu said.

Board of Governors of the Federal Reserve System

We have shown that sentiment deteriorates as changes in spending outpace changes in income. But people are not only spending more – we adjust for inflation – they are buying and consuming more in 2024 compared with 2019. To be sure, the survey’s readings are generally counter to market-based expectations, which indicate little worry of inflation ahead. However, Federal Reserve officials in recent days say they fear that consumer expectations can quickly become reality if behavior changes. Consumer and producer inflation readings this week showed price pressures easing in March. “Today’s figures raise more red flags about consumer spending in the weeks and months ahead,” the economists said.

Yet the fact that worries about employment are rising could lead to more caution by consumers. Americans’ inflation expectations over the next five years are now at the highest since 1991, according to Capital Economics, a forecasting firm. About 60% of consumers this month spontaneously mentioned tariffs coinsmart review during interviews, up sharply from 44% in March. Expectations have fallen a precipitous 32% since January, the steepest three-month percentage decline seen since the 1990 recession. While this month’s deterioration was particularly strong for middle-income families, views of the economic outlook in both the short and long run worsened for vast swaths of the population across age, education, income and political affiliation.

Historical Monthly Index of Consumer Sentiment

Also, the University of Michigan survey included responses between March 25 and April 8, the end period coming the day before Trump announced a 90-day stay on aggressive tariffs against dozens of U.S. trading partners. Sentiment declines came across all demographics, including age, income and political affiliation, according to Joanne Hsu, the survey’s director. Respondents’ expectation for inflation a year from now leaped to 6.7%, the highest level since November 1981 and up from 5% in March. At the five-year horizon, the expectation climbed to 4.4%, a 0.3 percentage point increase from March and the highest since June 1991. The decline was “pervasive and unanimous across age, income, education, geographic region, and political affiliation,” said Joanne Hsu, director of the survey.

Consumer spending makes up roughly two-thirds of the domestic economic output for the United States. “This lack of labor market confidence lies in sharp contrast to the past several years, when robust spending was supported primarily by strong labor markets and incomes,” Hsu said. Consumer sentiment fell sharply in April, marking the fourth consecutive month of declines, as an intensifying trade war fueled anxiety over American jobs and rising inflation. Economists also worry about signs of flagging consumer confidence, because ennui can prompt consumers to stop spending. The current economic conditions index fell to 56.5, an 11.4% drop from March, while the expectations measure slipped to 47.2, a 10.3% fall and its lowest since May 1980.

“Forecasting where inflation was headed since the pandemic has been a humbling experience for economists and financial markets, but consumers have done a fairly good job,” said Sweet. “Therefore, the rise in near-term inflation expectations should not be ignored and is being driven by tariffs.” American consumers expect prices to rise by 6.7% over the next year, according to a closely watched survey of consumer sentiment from the University of Michigan.