Consumer Sentiment Sours in September, Inflation Expectations Rise

Sentiment downturn is strong in lower- and middle-income levels.

Please consider the University of Michigan Preliminary Sentiment Results for September 2025.

Consumer sentiment moved down less than three index points in early September. This month’s easing in economic views was particularly strong among lower and middle income consumers. Buying conditions for durables improved, while all other index components fell. Consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labor markets, and inflation. Likewise, consumers perceive risks to their pocketbooks as well; current and expected personal finances both eased about 8% this month. Trade policy remains highly salient to consumers, with about 60% of consumers providing unprompted comments about tariffs during interviews, little changed from last month. Still, sentiment remains above April and May 2025 readings, immediately after the initial announcement of reciprocal tariffs.

Year-ahead inflation expectations held steady at 4.8%, unchanged from August. Long-run inflation expectations moved up for the second straight month to 3.9% in September. This current reading is considerably lower than the 4.4% seen in April.

Trade Policy and Expected Consumer Spending

The UoM discussion on Trade Policy and Expected Consumer Spending is from July so it’s a bit dated but worth a read.

The share of consumers spontaneously mentioning tariffs during interviews grew progressively between November 2024 and May 2025, just after the April announcement and pause of the initial reciprocal tariff schedule, and moderated somewhat in the months since. Inflation expectations follow a similar pattern: a sharp rise through May, and a softening thereafter but remaining well above readings from earlier in 2024. Although CPI inflation has not surged, our data show that consumers are still bracing for an increase in inflation to come.

Moreover, consumers are also concerned that labor markets will weaken. The share of consumers expecting unemployment to worsen in the year ahead was about 32% in 2022 and as recently as November 2024, but is now about 60%, a reading last seen in the Great Recession.

Only about 24% of consumers expect to spend as usual in the year ahead on items that have large price increases. The remaining consumers report that they would reduce their spending on such items, either by cutting back or stopping their spending on such items altogether. These results stand in contrast to the 2022 period (August through October), during which 36% of consumers expected to spend as usual. There are two key differences in the economic context. First, contemporaneous inflation was much higher in 2022 than now. Second, and more critically, consumers currently expect labor markets to weaken, which would reduce their income prospects and their ability to spend.

Expected spending responses vary across the population. Higher income consumers are much more likely to continue spending as usual than their lower-income counterparts, with similar patterns by terciles of stock wealth.

Across political affiliation, a clear majority of each political group anticipate reducing their spending on items that experience inflation. Still, partisan differences are visible; Republicans are less likely to expect reducing their spending than independents or Democrats. These patterns are consistent with historical patterns in which consumers tend to hold more favorable economic views when their party is in the White House.

Critically, research has shown that partisanship patterns are seen in actual spending behavior (as well as portfolio choice, entrepreneurship, patents, tax evasion, and other economic behaviors), so partisan differences in these survey responses cannot be dismissed as mere political posturing unrelated to behavior. When asked about what purchases consumers anticipate cutting back or delaying the most, the most common responses included car buying (19% of consumers), household items (17%), eating out (14%), and luxury purchases (13%).

In practice, consumers don’t spend on their inflation expectations. They spend on income levels and job worries.

Consumers were correct in expecting labor markets to weaken. And when labor markets weaken, low- and middle-income consumers either have to cut back or resort to borrowing on credit cards until their credit is curtailed.

That is the point we are at now. with labor markets weakening dramatically, yet still not collapsed.

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Actual vs Predicted Consumer Sentiment Is a Big Hoot

In case you missed it, please see Actual vs Predicted Consumer Sentiment Is a Big Hoot

Economists think people should be happy. They aren’t.

Economists, academics, and President Trump should stop telling people how they should feel because this is not a strong labor market.

And inflation, measure correctly is much higher than reported. For discussion, please see How Much Is Inflation Reducing Your Hourly Wages?