Inflation expectations among U.S. consumers skyrocketed in January, with rising fears over potential tariffs promised by President-elect Donald Trump. According to the University of Michigan’s latest survey, one-year inflation expectations climbed to 3.3%, up from 2.8% in December, marking the highest level since May. This sharp increase has pushed inflation expectations beyond the pre-COVID-19 average range of 2.3%-3.0%.

Long-Term Inflation Concerns Hit a 15-Year High

Long-run inflation expectations also rose to 3.3%, the highest since June 2008. These concerns have spread across all demographic groups, with lower-income households and independent voters experiencing the most significant increases.

Tariff Policies and Economic Impact

Proposed policies, including higher tariffs on imports and the deportation of undocumented immigrants, are raising alarm among economists, who warn these actions could further fuel inflation. Consumers fear these tariffs will drive up prices on everyday goods, straining household budgets.

The Federal Reserve Holds Steady Amid Inflation Fears

In response to soaring inflation expectations and a resilient labor market, the Federal Reserve is signaling fewer interest rate cuts in 2023. The Fed has already reduced its benchmark rate by 100 basis points since September but is likely to maintain its current rate of 4.25%-4.50% through mid-year.

Consumer Sentiment Takes a Hit

Higher inflation expectations are also weighing on consumer confidence. The University of Michigan’s Consumer Sentiment Index fell slightly in January, dropping from 74.0 in December to 73.2. A separate survey by LSEG/Ipsos showed a decline in the Primary Consumer Sentiment Index, which dropped by 3.2 points to 54.4.

This decline reflects consumer discomfort with making major purchases, diminished confidence in future investments, and concerns about job stability. These trends could have long-term implications for spending and economic growth.

Economic Uncertainty and Trump’s Policies

Concerns over Donald Trump’s economic strategies, including tariffs and trade policies, are denting consumer confidence. Experts believe this could signal a broader downturn or simply be a short-term reaction to market uncertainties.

Conclusion

As inflation fears grow, the U.S. economy faces mounting challenges. Rising prices, uncertain policies, and declining consumer confidence could reshape economic sentiment in 2023. Policymakers and economists will need to closely monitor these trends to mitigate potential risks to household budgets and the broader economy.

Source: reuters.com