US consumers’ long-term inflation expectations hit 32-year high

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US consumer sentiment tumbled in March as long-term inflation expectations hit their highest level in 32 years, underscoring worries that Donald Trump’s policies are hitting the economy.

The University of Michigan’s consumer sentiment index fell to a preliminary reading of 57.9 in March, the third consecutive monthly drop and the lowest reading since November 2022. Economists expected a smaller fall to 63.1 from 64.7 in February.

Inflation expectations one year ahead jumped to 4.9 per cent, their highest level since November 2022. Longer-term inflation expectations leapt to 3.9 per cent from 3.5 per cent, bringing them to their highest level since 1993, according to Bloomberg data.

“The drumbeat of bad news around the stock market and lay-offs among federal workers is clearly not sitting well with consumers,” said Ryan Sweet, chief US economist at Oxford Economics.

Unemployment fears among consumers polled by the University of Michigan also surged to levels last seen in the 2008 financial crisis.

The report comes ahead of the Federal Reserve’s meeting on Wednesday, when officials are expected to keep interest rates on hold. Fed chair Jay Powell last week downplayed concerns over growth, saying that the US central bank did “not need to be in a hurry” to cut interest rates.

But investors are increasingly concerned that Trump’s erratic policymaking on tariffs, marked by a series of sudden U-turns, is disrupting businesses and slowing growth.

Wall Street’s benchmark S&P 500 stock index fell into correction territory this week, before inching back.

Recent employment reports also have raised concerns that growth is slowing. That would normally offer scope for the Fed to cut interest rates, but policymakers may be reluctant to ease monetary policy while tariff fears trigger a rise in consumer inflation expectations.

Consumer prices increased at an annual rate of 2.8 per cent in February, down from 3 per cent in January and below Wall Street’s expectations.

“[The Fed] is pretty much damned if they do and damned if they don’t,” said Sweet. 

Many of the consumers surveyed by the University of Michigan pointed to the high levels of uncertainty around economic policy under Trump.

“Frequent gyrations in economic policies make it very difficult for consumers to plan for the future, regardless of one’s policy preferences,” said survey director Joanne Hsu.

There are already signs that economic uncertainty and renewed inflation fears have affected spending, with consumers increasingly ‘front-loading’ purchases of durable goods, like cars and home appliances, to try to get ahead of Trump’s tariffs on some of the country’s most important trading partners.

Consumer spending on durable goods jumped more than 4 per cent year-on-year in November, December and January — the latest months on record — more than double the rate in the three months leading up to Trump’s election, according to the US Bureau of Economic Analysis.

Paul Donovan, chief economist at UBS Global Wealth Management, said that Democrats, in particular, had been “front-loading” their spending out of fear of tariff-induced price hikes.

He warned that these upfront purchases could mask early warning signs of consumer weakness, and may also weigh on future demand.

That could pave the way for “a big drop-off” in spending later in the year, especially when tariff hikes, which are already pushing up some industrial prices such as those for metals, begin to be passed to consumers, said Joe Brusuelas, chief economist at tax and consulting firm RSM US.