Key Points at a Glance:

  • A consumer survey released by the University of Michigan on Friday showed that consumer confidence weakened notably this month and inflation expectations rose significantly, driven by concerns that the Trump administration's tariff policies could fuel inflation.
  • "Consumers' expectations for the inflation path deteriorated markedly this month—they are clearly preparing for inflation to make a comeback," said Joanne Hsu, the survey's director, in a statement. She noted that "consumers broadly expect tariff increases to lead to higher inflation," adding that "policy uncertainty means their views could change at any time."
  • All five sub-indices of the February confidence index declined, with the index for buying conditions for durable goods plunging 19%, which Hsu said was "largely driven by concerns that tariff-induced price increases are imminent."

In-Depth Analysis:

The Federal Reserve held its benchmark interest rate steady on January 29 due to concerns that the Trump administration's tariffs, deregulation, mass deportations, and tax cut plans could push inflation higher in the coming months. Meanwhile, Fed officials have said for weeks that they believe inflation expectations remain stable.

"Long-run inflation expectations—often a guide for future inflation—are mostly at healthy levels," said Raphael Bostic, President of the Atlanta Fed, in a report on Thursday.

Bostic noted that in December, respondents to the Atlanta Fed's Business Inflation Expectations survey said for the first time in four years that they expected unit costs to rise by only 2% on average over the next 12 months.

However, the University of Michigan survey found that consumers are currently far less optimistic.

Hsu said long-run inflation expectations rose to 3.5% this month from 3.2% in January, marking the largest month-over-month increase since May 2021 and well above the 2.3% to 3% range seen in the two years before the pandemic.

She noted that one-year-ahead inflation expectations jumped to 4.3% this month from 3.3% last month. The rise in both short- and long-run inflation expectations was "broad-based, spanning all income and age groups."

Hsu said about 40% of consumers spontaneously mentioned tariffs this month, compared with 27% in January and less than 2% before the November presidential election.

U.S. business confidence also fell sharply this month. S&P Global said on Friday that its Flash U.S. PMI showed business confidence hit a 17-month low.

"The optimism seen among U.S. businesses at the start of the year has evaporated, replaced by a gloomy picture of heightened uncertainty, stalled business activity, and rising prices," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, in a statement.

"Businesses are widely concerned about the impact of federal government policies, from spending cuts to tariffs and geopolitical developments," he said. "Sales are reportedly being hit by uncertainty stemming from the changing political landscape, while suppliers are raising prices due to tariff-related increases."

Williamson said the survey had shown at the end of last year that the U.S. economy would grow by more than 2% in 2025, but now points to growth of only 0.6% for the year.

The New York Fed's Empire State Manufacturing Survey also highlighted weak confidence and greater inflation risks.

"Input price increases accelerated to their fastest pace in nearly two years, and optimism about the outlook declined notably," said Richard Deitz, Economic Research Advisor at the New York Fed, in a statement. The regional Fed conducted the survey between February 3 and February 11.