Public expectations of inflation soared to 7.3% a year from now and to 4.6% over a five-year time frame, according to the University of Michigan’s consumer surveys for April released on Friday.
The sharp increase heightens the risk that the Fed is losing control of what until recently were well-anchored expectations.
The sharp increase, which comes as higher tariffs are about to take hold, heightens the risk that the Federal Reserve is losing control of what until recently were well-anchored expectations and, consequently, price stability.
American households are showing signs of rising financial stress, and this survey captures the growing discontent.
The top-line measure of consumer sentiment tumbled to 50.8 for the month, the second-lowest reading since the all-time low reached in June 2022.
But it’s the reading of inflation expectations that will be closely watched by the Federal Reserve since those expectations often become self-fulfilling.
Since the cyclical low of 2.6% reached in November, the 7.3% reached in April is the highest since 1981. Similarly, the five-year expectation of 4.6%, up from 3.2%, is the highest since 1991.
That increase, along with Walmart’s announcement on Thursday that it had started to hike prices because of tariffs, suggests that the Federal Reserve will not be lowering rates anytime soon.
Our forecast this year implies two rate cuts, but given both soft data of the rising inflation expectations and new hard data showing shrinking margins for machinery and vehicle wholesalers, we may need to push that forecast back to one cut in December.
The key idea is that inflation expectations are the primary transmission mechanism, along with retaliation by other nations, that turns tariffs into a sustained increase in inflation.
The effective tariff on imports into the United States is now 17.8%—once one adjusts for substitution effects it’s 16.4%—which is greater than seven times what it was before the trade war.
Read more of RSM’s insights on the economy and the middle market.
But the whipsaw changes in policy have led to crippling uncertainty for businesses.
On Friday, the administration, saying it lacks the capacity to negotiate individual deals with 150 nations, said that it would be sending letters in the coming weeks with specific tariff rates for some of the countries. The letters could provide the framework in which we can ascertain the macro and microeconomic impact from trade policy on the U.S. economy.
And remember that the administration has signaled to all concerned that it is not yet done setting tariffs on pharmaceuticals and long promised yet vague sector tariffs.
