Core Data: Consumer Confidence Hits Record Low

A University of Michigan survey released Friday showed that surging gasoline prices pushed consumer confidence to a record low this month, while also driving long-term inflation expectations up 0.5 percentage points to 3.9%.

The survey showed that nearly three-fifths (57%) of consumers spontaneously mentioned that high prices are eroding their financial situation, up 7 percentage points from April. The University of Michigan noted that confidence declines were particularly severe among lower-income groups and consumers without a college education.

"The cost of living remains the foremost concern," said Joanne Hsu, Director of the University of Michigan's Surveys of Consumers, in a statement. "The key point is that consumers seem worried that inflation will rise and spread beyond fuel prices, even over the long term."

Policy Implications: Fed Faces Pressure for Policy Shift

The continued rise in long-term inflation expectations is likely to increase the possibility that the Federal Reserve will raise the federal funds rate, to ensure that price increases do not drift further from the 2% target. Notably, the Fed has failed to meet its inflation target for five consecutive years.

Over the past year, policymakers have "looked past" energy cost shocks triggered by high tariffs and war, citing stable long-term inflation expectations. In fact, the Fed cut the federal funds rate by a cumulative 0.75 percentage points late last year, when it was confident in the downward trajectory of prices.

Additionally, the central bank maintained an easing bias in its most recent policy statement at the end of April, a move that drew dissents from three policymakers who called for a neutral stance.

Iran War and Inflation Pressures Prompt Officials to Reassess Outlook

The Iran war and rising prices have prompted Federal Reserve officials to readjust their outlook.

"Inflation is not moving in the right direction," Federal Reserve Governor Christopher Waller said in a speech on Friday.

"I will support removing the 'easing bias' language from the policy statement, to make clear that the likelihood of future rate cuts is not higher than that of hikes," Waller noted, pointing out that the labor market has shown signs of strengthening in recent months.

Waller said that if the Iran conflict is resolved in the short term, it could ease price pressures, but he added: "If inflation does not subside quickly, I cannot rule out the possibility of further rate hikes in the future."

Majority of Officials Lean Toward Rate Hikes, Market Expectations Rise

According to the minutes of the April meeting released Wednesday, Waller's view was shared by a majority of Fed officials. At the April 28-29 policy meeting, most participants indicated that it may be necessary to raise the key interest rate to cool inflation to the 2% target level.

Interest rate futures traders now price a 64% probability that policymakers will raise rates by at least 25 basis points this year, up from 57% yesterday, according to CME Group's FedWatch tool. A month ago, the market saw zero chance of a hike.

Economic Outlook: Consumer Pressures Coexist with Slowing Growth

Data from the Conference Board show that the decline in consumers' expectations for business conditions in April and over the past six months has weighed more on the U.S. economic outlook than any other factor tracked by the organization.

Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators at the Conference Board, said Friday that consumers' purchasing power may weaken in the coming months, especially for those with limited resources.

"Higher gasoline and energy costs—combined with weak hiring—could erode household purchasing power in the coming months, particularly for middle- and lower-income consumers," she said in a statement.

"Strong investment in AI infrastructure, data centers, and energy production could have a positive impact on growth and support business spending, but it may only partially offset weakness on the consumer side," she added.

Consumer spending supports nearly 70% of economic growth. The Conference Board forecasts that economic growth will slow to 1.7% this year, down from 2.1% in 2025.

Soaring Oil Prices: The Most Visible Affordability Signal

For consumers, surging gasoline prices are one of the most visible signals of declining affordability. Since U.S. and Israeli warplanes launched airstrikes on Iran on February 28, the average price of regular gasoline has soared 56% from $2.91 to $4.55 per gallon, according to AAA data.

Significant Differences Across Political Lines

Hsu said confidence among Republicans and independents fell this month to its lowest level since the start of Trump's second term. On inflation, she noted: "The rise in long-term expectations this month reflects a sharp jump among independents and Republicans. For the latter, their monthly long-term inflation expectation is now more than double the reading from February 2025."