Key Points

  • Data released by the University of Michigan on Friday showed that the consumer sentiment index fell 6% month-over-month this month, hitting its lowest level of the year. Market turmoil sparked by the Iran war pushed up gasoline prices and weighed on stock prices, becoming the main factor dragging down sentiment.
  • The survey showed that American households' expectations for the short-term economic outlook fell sharply by 14%, and expectations for their personal financial situation over the next year also dropped by 10%. The survey was conducted between February 17 and March 23.
  • "Households with middle and above income levels and stock holdings experienced particularly notable declines in confidence amid the Iran conflict, as they faced both rising oil prices and severe volatility in financial markets," said Joanne Hsu, director of the University of Michigan's consumer survey, in a statement.

In-Depth Analysis

University of Michigan data showed that American households' inflation expectations for the next 12 months rose to 3.8% from 3.4% in February, marking the largest single-month increase since April 2025. Hsu noted that this figure is not only higher than 2024 levels but also exceeds the 2.3% to 3% range seen in the two years before the pandemic.

Although Federal Reserve policymakers focus more on long-term inflation expectations, which edged down to 3.2% this month, the jump in short-term inflation expectations could still draw their attention, Hsu added.

"I think everyone agrees that we will be watching these data extremely closely to see how the price effects from the Iran conflict transmit," Federal Reserve Chair Jerome Powell said on March 18 regarding long-term inflation expectations. This came shortly after the Fed's decision-making body voted to hold the federal funds rate target range steady at 3.5% to 3.75%.

Powell also noted that short-term inflation expectations "have risen noticeably, and we know very well why." Gasoline prices have a significant impact on inflation expectations because they are displayed directly on price signs at gas stations.

A 2022 survey by the American Automobile Association (AAA) found that 59% of Americans said they would change their driving habits or lifestyle if gasoline prices exceeded $4 per gallon; this proportion rose to 75% if prices climbed to $5 per gallon.

Since the war broke out a month ago, the average U.S. gasoline price has surged 33% to $3.98 per gallon, according to AAA data. The ongoing stock market decline has also weakened household confidence. The S&P 500 has fallen 7.3% since U.S. and Israeli warplanes began airstrikes on Iraq on February 28.

"Consumers may not expect recent negative developments to persist over the long term," Hsu said. "But these views could change if the Iran conflict turns into a prolonged war, or if rising energy prices transmit to overall inflation."

Forecasts released Thursday by the Organisation for Economic Co-operation and Development (OECD) show that, driven by higher energy costs from the Iran war, overall U.S. inflation will surge to 4.2% this year, more than double the Fed's target level. The OECD also projects U.S. economic growth will slow to 2% this year from 2.1% in 2025, a downward revision of 0.3 percentage points from its December forecast.