Market News

Jarrell Dillard and Augusta Saraiva

(Bloomberg) -- US consumers’ expectations for long-term inflation rose to the highest rate in three decades on concerns President Donald Trump’s tariffs will translate into higher prices.

Consumers expect prices will climb at an annual rate of 3.5% over the next five to 10 years, according to the final February reading from the University of Michigan. The rate is the highest since 1995, based on data compiled by Bloomberg, and was almost entirely driven by views among survey respondents who are Democrats.

Partly as a result, the consumer sentiment index dropped to 64.7 from 71.7 in January — lower than analysts anticipated. Here, too, the results were politically polarized, with Democrats and political independent respondents driving the decline.

All five components of the index deteriorated, including a decline in buying conditions for big-ticket items. And more than half of consumers in the survey expect the unemployment rate to rise over the next year, the highest since 2020.

Inflation expectations have taken renewed importance as the prospect of trade wars is weighing on the outlook for prices paid by American consumers. The concerns dragged down the sentiment index, partly undoing a surge in the wake of Trump’s election in November that was driven by enthusiasm among Republicans and overall expectations that inflation would ease.

The uncertainty around tariffs and the potential impact on consumer prices may have implications for interest rates. Federal Reserve officials including Chairman Jerome Powell have signaled they’re in no rush to cut rates further after progress on inflation stalled. Over the next 12 months, inflation expectations rose to 4.3% in the Michigan survey.

“You can bet that Chairman Powell and company will take note of that and that this further seals the case for the Fed remaining on hold for a while,” said Stephen Stanley, chief US economist at Santander US Capital Markets LLC. “The question is whether President Trump and the Administration are paying attention to the souring of consumer moods due to the threat of tariffs.”

A sustained increase in long-term inflation expectations would be of particular concern. Several Fed officials have said they may not need to respond to short-term price increases caused by tariffs if inflation expectations remain stable. But any indication that consumers expect price gains to continue may require officials to raise interest rates to tamp out inflation.

“It could be appropriate to ignore, or ‘look through,’ an increase in the price level if the impact on inflation is expected to be brief and limited,” St. Louis Fed President Alberto Musalem said Thursday. “However, a different monetary policy response could be appropriate if higher inflation is sustained, or longer-term inflation expectations rise.”

Long-run inflation expectations “exhibit substantial uncertainty, particularly in light of policy changes under the new presidential administration,” according to a separate report from the University of Michigan on inflation.

“If consumers continue to ramp up their spending to avoid large anticipated price increases, higher inflation expectations could become self-fulfilling,” Joanne Hsu, director of the survey, said in a statement.

Economists, too, are anticipating higher inflation. A Bloomberg survey of analysts found an uptick in forecasts for the Fed’s preferred inflation measure in the first quarter compared with a month ago.

Separate data out Friday showed a slowdown in business activity in February, dragged down by the service sector. And existing-home sales dropped for the first time since September last month, as the combination of high mortgage rates and prices sets a grim backdrop heading into the crucial spring selling season.

In the Michigan survey, the current conditions gauge dropped to 65.7 from 75.1. Consumers’ perception of their financial situation deteriorated.

--With assistance from Nazmul Ahasan, Molly Smith, Alex Tanzi and Jonnelle Marte.

(Adds economists’ comments)