Consumer confidence drops amid inflation expectations
Consumer confidence drops amid inflation expectations
U.S. consumers got a little psyched out in February. Consumer confidence dropped sharply, according to The Conference Board, and the consumer expectations index — what they think about income, business conditions, the job market — dropped significantly. Consumers also believe inflation is going to get worse in the next 12 months. And inflation expectations can be a dangerous thing.
All the talk about tariffs is one factor freaking consumers out.
“Tariffs on Mexico, tariffs on Canada, reciprocal tariffs across the board,” said Alan Detmeister, an economist at UBS.
“There were even tariffs floated on Panama and Denmark and Greenland,” he said. “All of this is a concern because it could get into the inflation psychology, and people are hearing this and are like, ‘Oh, tariffs are coming. They’re going to push up inflation a lot.'”
In surveys, Republicans are less concerned about inflation or not at all, Democrats much more concerned. But the numbers aren’t totally partisan — independents are also worried.
“You can see it in the markets as well,” said Omair Sharif, president of Inflation Insights.
He said certain Treasury bonds have priced in higher inflation. Expectations can be dangerous, at least in theory, because they can become self-fulfilling prophecies.
“If you think prices are gonna rise, it might drive you to sort of make those purchases today instead of waiting for higher prices, which causes a jump in demand, which itself can lead to higher prices,” Sharif said.
That doesn’t appear to be happening, Sharif said, and it’s debatable whether this theory is reality right now.
“I would be a lot more worried about inflation expectations rising on the back of high actual inflation,” said David Mericle, chief U.S. economist at Goldman Sachs.
According to the consumer price index, year-over-year inflation came in at 3% in January.
He said the most dangerous kinds of inflation expectations are the ones created by living with actual inflation. “If inflation is high enough for long enough and it becomes part of your daily experience that you get used to it and it becomes self-perpetuating,” Mericle said.
The tariffs haven’t hit prices for most goods yet, so Mericle said he’s less worried about psychology for now. But our brains may be soaking in tariff-inflation talk for a while.
“Quite honestly, this could very much linger into the fall because you will get these constant updates on what’s happening with these investigations and individual nations,” Sharif said.
And psychology aside, the potential for tariffs to raise actual prices is very real.
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