Will Inflation-Weary Consumers Make The Fed’s Job Harder?

The ups and downs of President Donald Trump’s tariff policies have consumers feeling down and out, a closely followed survey showed Friday.

Consumer sentiment fell for the fourth straight month in April, dropping 11% from March, according to the Michigan Consumer Sentiment Index. The reading of 50.8 was well under the 54.6 expected by economists surveyed by Dow Jones Newswires and The Wall Street Journal, as a wide swath of the U.S. public raised worries about the state of the economy.

“Consumers report multiple warning signs that raise the risk of recession: expectations for business conditions, personal finances, incomes, inflation, and labor markets all continued to deteriorate this month,” said Joanne Hsu, director of the University of Michigan’s Survey of Consumers.

And that could be bad news for Federal Reserve policymakers, who look at consumer expectations to give them an idea of what’s to come.

Trade War Anxieties Shared Across Demographics

Worries of a growing trade war were the source of the anxiety, Hsu said, coming as President Donald Trump has initiated a number of new tariffs on foreign trading partners, some of which were later paused. 

The proposals have generated various responses, from roller-coaster movements in the stock market to retaliatory tariffs from China and other trading partners. The report showed that it’s causing anxiety for nearly everyone.

“This decline was, like the last month’s, pervasive and unanimous across age, income, education, geographic region, and political affiliation,” Hsu said.

Inflation Worries Hitting Weary Consumers

Consumers’ primary worry about tariffs seems to be inflation, as year-ahead expectations for price increases jumped to 6.7%, almost two percentage points higher than last month. This is the worst consumers have felt about inflation since 1981. 

The increasing consumer inflation expectations defy past historical trends, where people generally became more worried about higher prices as inflation rates rose, noted Wells Fargo economists Tim Quinlan and Shannon Grein. However, recent inflation readings show that price increases are slowing, including declines in consumer and wholesale inflation rates this week. 

“Consumers are growing increasingly concerned about the coming price environment given how widely tariffs are reaching,” the Wells Fargo note said. “Even as inflation has moderated over the past year, consumers are more price sensitive today, leaving less cushion for them to take price hikes.” 

Inflation Expectations Threaten to Make the Fed’s Job Harder

Elevated inflation worries could be a problem for the Federal Reserve. Officials follow consumers’ feelings about inflation because those inflation expectations can become self-fulfilling.

While tariffs are expected to cause prices to jump for some items, the one-time event could have a limited effect since inflation measures price increases compared to similar points in time, usually looking at the prior month and the past year.

“Monetary policymakers may look through a temporary pop in price growth when it comes to setting policy if it feels confident that longer-term inflation expectations are ‘anchored,’” the Wells Fargo note said.

The inflation expectations are poorly anchored when “the public reacts to a short period of higher-than-expected inflation by marking up their long-run expectation considerably,” according to former Federal Reserve Chair Ben Bernanke.

These decades-high inflation expectations could be a problem, economists said.

“We may not have seen price pressures in the official data in March, but the Fed will have to deal with containing or putting a lid on inflation expectations while, at the same time, dealing with slower growth and, perhaps, potential challenges to their independence,” wrote BMO Senior Economist Jennifer Lee.