Consumer sentiment plunged in early February, with the University of Michigan’s final Index of Consumer Sentiment falling to 64.7 from 71.7 in January. This marks the lowest reading since November 2023 and reflects a 9.8% decline month-on-month and a 15.9% drop from the same period a year earlier. The data reveals mounting concerns among consumers about rising prices and the potential economic fallout from evolving political developments.
A key driver of the downturn was the sharp rise in inflation expectations. Households now anticipate prices to increase by 4.3% over the next year, up from 3.3% in January. This represents the steepest one-month jump since November 2023. Long-term inflation expectations also rose to 3.3%, the highest since mid-2008. These figures suggest that consumers are preparing for sustained price pressures rather than a swift return to the Federal Reserve’s 2% inflation target.
Much of the anxiety appeared tied to renewed political rhetoric surrounding trade tariffs. Recent statements by political leaders about potentially imposing new tariffs on goods from China, Mexico, and Canada have reawakened concerns about price increases. Approximately 40% of consumers specifically cited tariffs as influencing their economic outlook, a notable increase from 27% the month before and a significant jump from near-zero figures earlier in the election cycle. University of Michigan economist Joanne Hsu commented that consumers are “clearly bracing for a resurgence in inflation,” attributing much of the pessimism to fears about policy-driven cost increases.
The sentiment decline was broad-based, affecting all political affiliations. Both current economic conditions and future expectations fell significantly. The index for current conditions dropped to 65.7 from 75.1, while expectations for the future decreased to 64.0 from 69.5. Consumers reported declining confidence in both their personal finances and the broader economy.
Consumer attitudes toward major purchases also took a hit. The buying conditions index for durable goods declined by nearly 19%, a reflection of growing reluctance to make big-ticket purchases amid price uncertainty. Many households are holding back on purchases like appliances and automobiles as they wait for clearer economic signals or price stability.
There was also a noticeable drop in financial optimism. Nearly 40% of respondents reported that high prices were eroding their standard of living. Although most consumers expect income gains over the next year, only 16% believe their income will outpace inflation, highlighting fears about shrinking purchasing power. Expectations for personal finances and the long-term economic outlook both declined by nearly 10%, with the long-run outlook hitting its lowest level since the final months of 2023.
Federal Reserve policymakers are paying close attention to these developments. Inflation expectations are a critical factor in determining interest rate policy, as they influence both wage negotiations and pricing strategies. While some Fed officials, such as Chicago Fed President Austan Goolsbee, have voiced a preference for market-based measures over survey-based ones, the latest consumer sentiment readings could weigh heavily in upcoming decisions. Persistent elevated expectations risk fueling an inflationary cycle that could complicate efforts to achieve price stability.
The timing of this sentiment drop comes amid mixed economic indicators. While job growth has remained steady and retail sales showed modest increases in January, the decline in consumer confidence could signal future softness in spending. Economists warn that if sentiment continues to deteriorate, it may begin to dampen economic activity more broadly, particularly in consumer-driven sectors.
With political uncertainty intensifying and inflation expectations climbing, American consumers appear increasingly wary. The sharp dip in consumer sentiment serves as a cautionary signal that households are not just reacting to current prices but are also deeply concerned about where the economy is heading. Whether due to fears of new tariffs, stalled wage growth, or broader economic instability, consumers are pulling back, posing potential challenges for economic momentum in the months ahead.
