Inflation Fears Drive Consumer Sentiment to Four-Month Low

Consumer sentiment fell this month to a four-month low, and views of personal finances slumped about 10%, the University of Michigan said Friday, citing mounting worries about persistent inflation.

Concerns about high fuel prices and renewed U.S. trade disputes eroded household assessments of short-term business conditions, the university said, based on its survey results. Expectations for inflation over both the short and long term rose.

"Overall, interviews reveal broad agreement across the political spectrum that the outlook for the economy has weakened since the beginning of the year," Joanne Hsu, director of consumer surveys at the University of Michigan, said in a statement. Since January, sentiment among Republicans has sagged 20% and among Democrats 13%, she said.

Despite the dimming mood, consumers have shown no sign of cutting spending.

Retail sales across a full range of goods jumped a higher-than-forecast 1.2% in August on a month-over-month basis after shrinking 0.5% in July, according to the Census Bureau. From June through August, sales increased 6% compared with the same period last year. In the segments tracked by Retail Dive, sales rose almost 7% year over year in August, with large boosts from e-commerce, electronics and sporting goods.

"Consumer sentiment is low," Anna Paulson, president of the Federal Reserve Bank of Philadelphia, said in a speech, "but the spending data tell a different story."

"After a slow start to the year, real consumption growth accelerated to an annualized rate of 3.4% in the second quarter," Paulson said Thursday.

Price pressures may actually be pushing consumers to spend now rather than watch their buying power erode further, Hsu said.

"Buying conditions for durables improved a bit, in part due to a perception that completing such purchases now would help consumers avoid higher prices in the future," she said.

By the same logic, worsening inflation expectations may continue to spur consumer spending. Expectations for inflation a year out rose this month to 4.6% from 4% in August, Hsu said.

"The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings," she said.

Long-run inflation expectations among consumers climbed to 3.4% from 3.3% in August, exceeding the range of 2.8% to 3.2% during 2024, according to Hsu.

The inflation data have already forced the Federal Reserve's hand. Policymakers on Sept. 16 increased the federal funds rate to a range between 3.75% and 4%, the first tightening in three years.

"The inflation outlook continues to be highly uncertain, with risks tilted to the upside," Cleveland Fed President Beth Hammack said Thursday, noting a series of "supply shocks" from tariffs and oil prices.

"The longer that high inflation persists, the more challenging and costly it can be to bring it back down," Hammack said, pointing out that inflation has exceeded the Fed's 2% target for more than five years.

Paulson left no room for above-target inflation.

"Let me be clear: returning inflation to 2% is nonnegotiable, and I will support the policy path that gets us there while carefully weighing risks to the labor market along the way," she said.

For marketers and retailers, the message from September's data is a split screen: sentiment is deteriorating on both sides of the political aisle, but fear of higher prices ahead is pulling dollars forward — a dynamic that could keep tills ringing even as confidence falls, at least until tighter Fed policy bites.