At a Glance

  • This month, U.S. consumers' expectations for inflation over the next year surged to 7.3%, the highest level in decades, driven mainly by concerns that the broad tariffs imposed by President Donald Trump will push up prices.
  • The University of Michigan said on Friday that tariff-induced inflation anxiety has dragged consumer sentiment down nearly 30% since January, with the confidence index among Republicans falling 7% in May.
  • "Nearly three-quarters of consumers spontaneously mentioned tariffs, up from nearly 60% in April," Joanne Hsu, director of the university's Surveys of Consumers, said in a statement. "Trade policy uncertainty continues to dominate consumers' views of the economy," she added.

Deep Dive

Consumer sentiment and inflation expectations have deteriorated steadily this year, even as so-called hard data show stable price pressures and a strong labor market.

U.S. nonfarm payrolls rose by 177,000 in April, with the unemployment rate holding at a historically low 4.2%.

Meanwhile, annual inflation slowed in April to its weakest pace since February 2021. The U.S. Bureau of Labor Statistics said Tuesday that the Consumer Price Index (CPI) rose 0.2% month over month last month, below expectations, and 2.3% year over year.

In addition, Commerce Department data on Thursday showed retail sales stayed positive in April, rising 0.1% month over month, after a 1.7% increase in March.

Despite this, "consumers remain pessimistic about the economy," Hsu said.

After reaching a deal with the UK earlier this month to cut import tariffs, the Trump administration announced on May 12 that it would reduce tariffs on Chinese imports from 145% to 30%. This easing of high tariffs is intended to provide time for trade negotiations but will expire after 90 days.

The Yale Budget Lab noted that even after recent reductions, the effective tariff rate facing U.S. consumers remains at 17.8%, the highest level since 1934.

The Yale Budget Lab said on May 12 that current import tariffs will push up the price level by 1.7% in the short term, costing the average American household an additional $2,800 per year.

Hsu said one-year inflation expectations "rose among both Democrats and Republicans" this month. Longer-run inflation expectations rose to 4.6% from 4.4% in April, "reflecting a particularly large monthly jump among Republicans."

Walmart, the largest U.S. retailer, said Thursday that it will have to raise prices because of the Trump administration's tariffs on imports from nearly all U.S. trading partners.

"We're prepared to handle tariff cost pressures as well as, if not better than, any peer," Walmart CEO Doug McMillon said on an analyst call. "But even with lower tariff levels, higher tariffs will still lead to price increases."

FactSet senior earnings analyst John Butters said in a report Friday that from March 15 through Thursday, a record 411 companies in the S&P 500 mentioned the word "tariff" on earnings calls.

Butters said the previous record was 260 companies mentioning tariffs during fourth-quarter 2020 earnings calls.