US consumer sentiment slides to 3-year lows as trade war raises inflation anxiety

Key Points

• The University of Michigan consumer sentiment index fell to 50.8 in May, its second-lowest reading in nearly 75 years and down almost 30% since January.
• Americans increasingly worry that President Trump’s trade war and high tariffs will slow growth and push up prices.
• Consumers’ inflation expectations jumped to 7.3% over the next year (highest since 1981) and 4.6% over five years (highest since 1991).
• Sentiment shows a sharp partisan divide, with Democrats at a record-low 33.9 and Republicans at 84.2, the lowest since Trump’s election.

WASHINGTON (AP) — U.S. consumer sentiment fell slightly in May for the fifth straight month, surprising economists, as Americans increasingly worry that President Donald Trump’s trade war will worsen inflation.

The preliminary reading of the University of Michigan’s closely watched consumer sentiment index, released Friday, declined 2.7% on a monthly basis to 50.8, the second-lowest level in the nearly 75-year history of the survey. The only lower reading was in June 2022. Since January, sentiment has tumbled nearly 30%.

Americans have largely taken a sour view about where the economy is headed in the wake of the Trump administration’s imposition of huge import duties, which threaten to slow growth and push up prices. In recent weeks the White House has pulled back on its most draconian policies, though average duties are still high by historical standards.

Consumers' outlooks are also sharply divided by their political views, which has caused some economists to question the survey's results. The University of Michigan also last year switched from using both online and phone responses to just online, which some analysts worry may have introduced a more negative bias.

The sentiment index for Democrats fell to 33.9 this month, the lowest since partisan data began in 1980 and far below the levels reached in the depths of the COVID pandemic or during the 2008-2009 Great Recession.

For Republicans, it's 84.2, though that slipped from 90.2 in April and is the lowest since Trump's election.

Trump had slapped 145% tariffs on all imports from China, a move that effectively suspended trade with the United States’ third-largest trading partner in goods. But on Monday, the two countries said they had reached a deal that would lower U.S. tariffs to 30%, while China would cut its duties on U.S. exports to 10% from 125%.

The survey was taken between April 22 and May 13, which includes just two days after the China tariffs were reduced.

Yet on Thursday Walmart said it had started to lift prices in response to the tariffs and will do so even more in June and July just as families gear up the back-to-school season. The company counts 90% of the U.S. population as customers and price hikes at the nation’s largest retailer may start to sink in with Americans who have already been buffeted by post-pandemic inflation.

The survey found consumers are increasingly worried about rising inflation. Over the next 12 months, consumers expect inflation to jump to 7.3%, the highest since 1981 and up from an expectation of 6.5% last month. Over the next five years, they foresee inflation reaching 4.6%, the highest since 1991, up from 4.4% last month.

Those expectations typically run higher than actual inflation, which last month ticked down to 2.3%, the lowest level in more than four years. Still, economists and the Federal Reserve closely watch inflation expectations, because they can become self-fulfilling. If people are worried inflation will accelerate, they may take steps, such as demanding higher pay, that can push up prices.

Federal Reserve Chair Jerome Powell has said the Michigan inflation expectation numbers are an “outlier." Market-based measures of future inflation, which some Fed officials put greater weight on, have remained mostly stable. Still, the steady rise in the Michigan survey's inflation expectations could make it less likely the Fed will cut its key interest rate anytime soon.