U.S. consumer sentiment plunged to a nearly 2-1/2-year low in March and inflation expectations soared amid worries that President Donald Trump's sweeping tariffs, which have ignited a trade war, would boost prices and undercut the economy.
The deterioration in sentiment and inflation expectations reported by the University of Michigan Surveys of Consumers on Friday was across political party affiliation, with consumers saying "frequent gyrations in economic policies make it very difficult for consumers to plan for the future."
That mirrors similar concerns in some business surveys. The uncertainty created by Trump's on-again and off-again tariffs as well as an escalation in trade tensions risks derailing the economic expansion. Fears of higher prices, which drove consumers' long-term inflation expectations to levels last seen in early 1993, create a challenge for Federal Reserve officials as they consider the next steps for monetary policy.
"The jury is back and the verdict is in. Trump 2.0 policies are harming the economy and the future prosperity of America," said Christopher Rupkey, chief economist at FWDBONDS. "The consumer is frightened and sees sharply higher prices ahead despite the assurances from Washington that trade tariffs are good for the economy."
The University of Michigan said its Consumer Sentiment Index dropped to 57.9, the lowest level since November 2022, from a final reading of 64.7 in February. Economists polled by Reuters had forecast the index falling to 63.1.
The index has erased all the gains posted in the aftermath of Trump's election victory in November.
The weakness in sentiment this month reflected a deterioration in expectations for the future across multiple facets of the economy, including personal finances, employment, inflation, business conditions and the stock market.
Republicans recorded a 10% drop in their expectations index, while Independents saw a 12% decrease. Expectations among Democrats tumbled 24%.
"Consumers from all three political affiliations are in agreement that the outlook has weakened since February," said Surveys of Consumers Director Joanne Hsu. "Many consumers cited the high level of uncertainty around policy and other economic factors."
TARIFF WHIPLASH
Trump has slapped a raft of tariffs on a wide range of goods from key trade partners like Canada, China and the European Union, which have responded with duties of their own. Some tariffs have been imposed and then suspended for a month.
Trump on Thursday threatened to hit Europe with a 200% tariff on wine, cognac and other alcohol imports. The tariff whiplash and escalation in the trade war have rattled financial markets, sparking a selloff on the stock market, which also contributed to depressing sentiment this month.
Consumers' 12-month inflation expectations jumped to 4.9%, the highest level since November 2022, from 4.3% in February. Over the next five years, consumers saw inflation running at 3.9%. That was the highest reading since February 1993 and compared with 3.5% in February.
Stocks on Wall Street were trading higher after being battered in the prior sessions. The dollar was little changed against a basket of currencies. U.S. Treasury yields rose.
Fed officials meeting next week are expected to leave the U.S. central bank's benchmark overnight interest rate in the 4.25%-4.50% range, having reduced it by 100 basis points since September, and continue to assess the economic impact of the Trump administration's policies.
Financial markets expect the Fed to resume cutting borrowing costs in June after it paused its easing cycle in January amid a darkening economic outlook. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.
Trump has also embarked on an unprecedented campaign to drastically shrink the government through tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, which has slashed funding and fired thousands of federal workers.
Unions representing some of the civil servants have challenged the layoffs, resulting in reinstatements. A federal judge on Thursday ordered six agencies, including Veterans Affairs, to reinstate thousands of recently hired employees who have been fired. Agencies had a Thursday deadline to submit plans for large-scale layoffs.
