U.S. Inflation Rate to Return to 4%? Growing Consumer Anxiety

Consumer sentiment worsens as inflation expectations surge, delaying possible interest rate cuts

Concerns over inflation in the United States, which seemed to be easing last year, are resurfacing. This has raised expectations that the Federal Reserve may delay any interest rate cuts in the first half of this year. This shift is largely due to price hikes, particularly in consumer goods, driven by rising tariffs under President Donald Trump’s administration, which has placed pressure on global markets.

The University of Michigan’s consumer sentiment survey, released on February 7, revealed that U.S. consumers now expect inflation to rise by 4.3% over the next year. This marks a significant increase of one percentage point from the previous month’s expectation of 3.3%. This figure reflects the growing anxiety among Americans about the economy, particularly in light of the impact of tariffs imposed by the Trump administration. These tariffs include a 25% tariff on imports from Mexico and Canada and an additional 10% tariff on goods from China, which are driving up prices on consumer goods.

According to Joel H. F. Director, who conducted the survey, such a sharp rise in inflation expectations is unusual, with only five instances in the last 14 years where a 1% increase in expectations occurred within a single month. Before the pandemic, the average expectation for inflation was around 2.3% to 3.0%. Therefore, the current spike is a stark contrast to those pre-pandemic levels.

The survey also showed a decline in consumer sentiment, with the preliminary consumer sentiment index dropping to 67.8% in February, a decrease of 2.9% from January and 10.5% from the previous year. This marks the lowest reading since July of last year, signaling that consumers' outlook on the economy has worsened across all demographics, regardless of political affiliation, age, or asset wealth.

The report noted a significant drop in consumer confidence regarding the purchase of durable goods, which fell by 12%. This reflects concerns that the negative effects of tariff policies might already be too widespread to avoid, with consumers feeling that the situation is out of their control. Additionally, expectations regarding personal finances have dropped by about 6%, a reflection of growing fears that inflation might escalate again within the next year.

As inflation concerns rise, the timeline for interest rate cuts has been pushed back. Data from the U.S. Department of Labor, which released employment figures for January, showed a drop in the unemployment rate from 4.1% to 4.0%, with wages rising by 0.5% from the previous month. This indicates a continued strength in the U.S. labor market, which has led economists to predict that the Federal Reserve will likely hold off on cutting interest rates. Markets, as reflected in the CME FedWatch tool, now show a 91.5% chance that the Federal Reserve will leave interest rates unchanged in March, up from 84% the previous day. Similarly, the likelihood of a rate cut in May and June has dropped, with projections now sitting at 54% and 55%, respectively.

Economists, including Shima Shah, Chief Global Strategist at Principal Asset Management, believe that the January jobs report makes it unlikely that the Federal Reserve will cut rates in March. The strength of the labor market and continued wage pressures indicate that the economy remains resilient. Michael Collins, a portfolio manager at PGMI, also highlighted that the strength of the labor market serves as a signal that the Federal Reserve may not make any rate cuts this year.

As inflation concerns rise again, U.S. consumers remain on edge, and economists predict that the U.S. economy will continue to face challenges in managing inflationary pressures while maintaining growth. With key economic indicators like the labor market showing positive signs, the Federal Reserve’s approach will likely remain cautious, and the timeline for any potential interest rate cuts could continue to be delayed.