Consumer sentiment falls to new low; cost of living ‘first-order’ worry

Dive Brief:

Soaring gasoline prices rattled consumer sentiment to a new record low this month while pushing up long-run expectations for inflation by 0.5 percentage point to 3.9%, the University of Michigan said Friday, reporting on survey results.
Nearly three out of five consumers (57%) spontaneously said that high prices are eroding their finances, an increase of 7 percentage points from April, the university said. The plunge in sentiment among lower-income consumers and those without college degrees was especially severe, the university said.
“The cost of living continues to be a first-order concern,” Joanne Hsu, director of the university’s surveys of consumers, said in a statement. “Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run,” she said.

Dive Insight:

A sustained rise in long-run inflation expectations would likely increase the odds that the Federal Reserve will raise the federal funds rate to ensure price gains do not stray much further above their 2% goal. They have failed to meet their inflation target for five years.

During the past year policymakers have “looked through” price shocks from high tariffs and a war-induced surge in energy costs, noting that long-run inflation expectations have remained stable.

Indeed, the Fed trimmed the federal funds rate by a total of 0.75 percentage point late last year, confident that prices were on a downward trajectory.

Also, the central bank maintained a bias toward more easing in a policy statement as recently as late April, triggering a dissent by three policymakers who called for a neutral stance.

The Iran war — and rising prices — have prompted Fed officials to recast their outlook.

“Inflation is not headed in the right direction,” Fed Governor Christopher Waller said in a speech Friday.

“I would support removing the ‘easing bias’ language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase,” he said, noting that the labor market has shown signs of firming in recent months.

A near-term resolution of the Iran conflict would likely ease price pressures, Waller said, while adding, “I can no longer rule out rate hikes further down the road if inflation does not abate soon.”

Waller’s view is shared by a majority of Fed officials, according to minutes of their April gathering released on Wednesday. Most participants at the April 28-29 policy meeting indicated that an increase in the main interest rate may be needed to cool inflation to their 2% goal.

Traders in interest rate futures see 64% odds that policymakers will increase the benchmark rate this year by at least a quarter percentage point, an increase from 57% odds yesterday, according to the CME Group’s FedWatch tool. A month ago they saw no possibility of an increase.

In April — and for the past six months — falling consumer expectations for business conditions have undermined the outlook for the U.S. economy more than any other factor tracked by the Conference Board.

Affordability for consumers will probably wane in coming months, especially for those with limited resources, Justyna Zabinska-La Monica, senior manager for business cycle indicators at the Conference Board, said Friday.

“Higher gasoline and energy costs — paired with weak hiring — will likely erode household purchasing power in the months ahead, particularly for lower- and middle-income consumers,” she said in a statement.

“Strong investment in AI infrastructure, data centers and energy production likely will have a positive impact on growth and sustain business spending, but may only partially offset weakness on the consumer side,” she said.

Consumer spending fuels nearly 70% of economic growth. The Conference Board forecast that economic growth will slow to 1.7% this year from 2.1% in 2025.

For consumers, surging gasoline prices are one of the most visible signs of declining affordability.

Since Feb. 28, when U.S. and Israeli warplanes launched strikes against Iran, the average price for a gallon of regular gasoline has soared from $2.91 to $4.55, an increase of 56%, according to AAA.

The sentiment among Republicans and independents fell this month to the lowest level since the beginning of the second Trump administration, Hsu said.

Regarding inflation, “this month’s increase in long-run expectations reflects sizable jumps among independents and Republicans,” she said. “For the latter group, long-run inflation expectations are currently more than double their February 2025 reading on a monthly basis.”