Consumer sentiment soured in May, especially among Republicans.
The University of Michigan Consumer Survey shows a souring of economic mood and a rise in inflation expectations, especially among Republicans.
Consumer sentiment was essentially unchanged this month, inching down a scant 1.4 index points following four consecutive months of steep declines. Sentiment is now down almost 30% since January 2025. Slight increases in sentiment this month for independents were offset by a 7% decline among Republicans. While most index components were little changed, current assessments of personal finances sank nearly 10% on the basis of weakening incomes. Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy. Note that interviews for this release were conducted between April 22 and May 13, closing two days after the announcement of a pause on some tariffs on imports from China. Many survey measures showed some signs of improvement following the temporary reduction of China tariffs, but these initial upticks were too small to alter the overall picture – consumers continue to express somber views about the economy. The initial reaction so far echoes the very minor increase in sentiment seen after the April 9 partial pause on tariffs, despite which sentiment continued its downward trend.
Year-ahead inflation expectations surged from 6.5% last month to 7.3% this month. This month’s rise was seen among Democrats and Republicans alike. Long-run inflation expectations lifted from 4.4% in April to 4.6% in May, reflecting a particularly large monthly jump among Republicans. The final release for May will reveal the extent to which the May 12 pause on some China tariffs leads consumers to update their expectations.
Expected Inflation Key Points
- Current-year inflation expectations are 7.3 percent. That’s the highest since November 1981.
- Five- year inflation expectations are 4.6 percent. That’s the highest since January 1991.
University of Michigan Consumer Sentiment
Other than the pandemic low of 50.0, consumer sentiment is the lowest in history.
Thank Trump for that.
It’s a Good Thing
It’s a good thing inflation expectations don’t matter.
Every FOMC meeting the Fed Chair, currently Jerome Powell, makes a fool of himself with nonsensical discussions on inflation expectations.
How can they matter? If you do think they matter, then answer this simple Q&A.
Consumer Inflation Expectations Q&A
- If you think the price of rent will jump next year, will you rent two houses now to beat the rush?
- If you think the price of rent will fall next year, will you hold off renting until rent falls?
- If you think the price of medical care will jump next year, will you have two operations now to beat the rush?
- If you think the price of medical care will fall next year, will you hold off on a needed operation?
- If you think the price of a vacation will jump next year, will you have two vacations this year and none the next?
- If you think the price of a vacation will drop next year, will you have no vacations this year and two the next?
- Will you stop eating? Eat more?
- If you car breaks down will you fix it twice? Wait until next year?
OK, maybe you wait for a sale to buy a coat. But you probably don’t by two. And if your coat rips, and you need one, you may not wait at all.
OK, some people rushed to but cars ahead of the tariffs. Will they buy a second car? Of course not.
They moved up a purchase of a car by a few month or so, perhaps less.
Businesses Inflation Expectations
Grocery stores can’t do anything at all, for obvious reasons.
Manufacturers can order ahead, and did to beat tariffs, but now they now have big inventories.
How many cars can dealers fit on their lots? And what if consumers don’t buy?
Dealers can only hold a few month’s inventory, assuming storage space, but at a cost and risk of declining prices if consumers throw in the towel.
Fed Study Agrees
No study should be needed to prove the logic of what I just stated. However we do have a study, and it’s by the Fed.
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Please consider Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?) by the Federal Reserve.
Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.
The direct evidence for an expected inflation channel was never very strong. Most empirical tests concerned themselves with the proposition that there was no permanent Phillips curve tradeoff, in the sense that the coefficients on lagged inflation in an inflation equation summed to one.
Finally, even if one is willing to entertain the idea that in some vague, mushy sense concern over costs and demand by individual firms facing fixed prices leads to a dependence of aggregate inflation on expected inflation, we are still left with the conclusion that short-run expectations should be the ones that are most important.
One might also be uneasy about policymakers’ relying too heavily on the assumption that inflation’s long-run trend will remain stable going forward so long as measured long-run inflation expectations do. Even if every one of my preceding arguments is judged by the reader to be completely unconvincing, it nevertheless remains the case that we have nothing better than circumstantial evidence for a relationship between long-run expected inflation and inflation’s longrun trend, and no evidence at all about what might be required to keep that trend fixed (beyond that it might involve keeping actual inflation from moving up too much above two percent on a sustained basis).
[Mish note: The lpreceding two paragraphs are a direct criticism of Fed policy as practiced by every Fed chair and people dismiss these reports without reading. The next paragraph is a hoot as well.]
Or would you justify the view that expectations “matter” by pointing to the inflation experience of the 1960s and 1970s, even though that period provides no actual evidence that workers or firms tried to boost their wages or raise their prices in anticipation of future price or cost changes?
Amusing Quotes
- Expectations are by definition a force that that you intuitively feel must be ever present and very important but which somehow you are never allowed to observe directly: R. M. Solow (1979)
- Pure economics has a remarkable way of pulling rabbits out of a hat. It is fascinating to try to discover how the rabbits got in; for those of us who do not believe in magic must be convinced that they got in somehow: J. R. Hicks (1946)
- Don’t interfere with fairy tales if you want to live happily ever after: F. M. Fisher (1984)
- Few things are harder to put up with than the annoyance of a good example: Mark Twain, The Tragedy of Pudd’nhead Wilson (1894
Do Inflation Expectations Matter?
I have discussed inflation expectations at least ten times over the years.
Here’s one from 2023 when I tangle with Bill Fleckenstein regarding the question How Do Inflation Expectations Impact Wages and Future Consumer Inflation?
Fleckenstein is an inflation expectations believer.
Phillip’s Curve Nonsense
Also see Yet Another Fed Study Concludes Phillips Curve is Nonsense
Despite the Fed’s own studies, every Fed president still believes in the Phillip’s Curve and Inflation Expectations.
They have been trained to believe nonsense.
Asset Price Expectations
Asset price expectations are another matter. That’s why we have bubbles and crashes.
People will buy houses and stocks if they think prices will rise. People don’t by stocks if they think they will fall.
But asset prices are not in either the CPI or PCE price indexes. Fostering asset prices bubbles is a constant mistake by the Fed.
The one place expectations do matter is in asset bubbles, and it’s the only place the Fed doesn’t look!
Inflation Expectation Reality
Inflation and media reporting of it drives expectations, not the other way around.
That’s a good thing for the Fed right now, even if the Fed is too clueless to believe the obvious (and their own studies).
Warning Regarding “Expectations Don’t Matter”
Doesn’t matter means just that. No direction is implied.
Doesn’t matter does not imply “won’t happen”.
There are plenty of reasons to believe inflation will trend higher.
The bond market is reacting that way. Walmart and the automakers are hiking prices.
And Trump is trying to talk tough on tariffs again.
Trump Blasts Walmart on Price Hikes, Sounds Just Like Elizabeth Warren
Yesterday, I commented Trump Blasts Walmart on Price Hikes, Sounds Just Like Elizabeth Warren
Republicans should be seriously embarrassed by Trump.
“Walmart made BILLIONS OF DOLLARS last year,” he wrote in a post Saturday on Truth Social. “Between Walmart and China they should, as is said, ‘EAT THE TARIFFS,’ and not charge valued customers ANYTHING. I’ll be watching, and so will your customers!!!”
Lat year, in a letter to Kroger, Senators Elizabeth Warren and Bob Casey accused large grocery chains like Kroger and Walmart of being poised “to squeeze consumers to increase profits.”
Now Trump says Walmart should “EAT THE TARIFFS”
On April 11, 2025, I noted Tariff-Related Auto Price Increases Have Arrived, Will Get Much Worse
New Car Prices Are Ticking Up. Sales “Hangover” is Likely as Trade Wars Heat Up.
On May 15, I noted Walmart CFO Warns Price Hikes Are Coming, Blames Tariffs
Walmart says it will pass on some tariff price hikes.
And now Walmart has.
But nothing is baked in the mid-term cake because no one knows what Trump will do, including himself.
Technically Speaking
On May 3, I discussed Ominous Looking 10-Year and 30-Year US Treasury Yield Charts
The technical patterns on long-dated treasuries suggest rising yields. What about fundamentals?
The patterns have not changed and the fundamentals including the budget and Walmart are worsening.
A normal recession would reduce demand and prices. But the current setup with rising long-term yields looks more staflationary than anything else.
Fundamentally and technically the bond market reaction makes sense to me.
Reader Question on Real Estate
“Mish – what’s your take on real estate? Where do you see commercial and residential going in the next 12 months?”
Very good question.
Commercial: If trade sinks, and that is likely, the need for warehouses drops (although there is a temporary demand now to stockpile).
The easy conversions from unused office space to apartments has already been done.
What remains is the harder to convert buildings.
I rather doubt we have a wave of new hires coming so any demand is just to bring workers back to the office, and a lot of that is hoping people quit.
More malls? Not at these rates with this tariff uncertainty.
Residential: Prices still too high. Interest rates still way too high. A recession may cure some of that, but it also implies more people out of work.
Weakness in both.
good take. thanks.
Mish – what’s your take on real estate? Where do you see commercial and residential going in the next 12 months?
Very good question.
Commercial: If trade sinks, and that is likely the need for warehouses drops (although there is a temporary demand now to stockpile).
The easy conversions from unused office space to apartments has already been done.
What remains is the harder to convert buildings.
I rather doubt we have a wave of new hires coming so any demand is just to bring workers back to the office, and a lot of that is hoping people quit.
Residential: Prices still too high. Interest rates still way too high. A recession may cure some of that, but it also implies more people out of work.
Weakness in both.
Thank you.
Oh the TDS in the comments.
Dictators dont care about inflation. Especially when its the 1st year of their reign. As long as the shipment of water cannons, tear gas and lots of Federal employees with guns are available, Trump doesnt give a wiff about inflation.
zion don is standard latin amerikan style wannabe dictator. he’ll probably ruin the currency, too.
Eh, remember the billionaires have their wealth denominated in a currency. They will never allow the dollar to go anywhere near zero.
Billionaires can pivot into different currencies/assets, far easier than anyone else can. I haven’t seen any sign of them not “allowing” the dollar to be in trouble. And bond yields can fill that gap.
Has trump ever been a major disappointment. Inflation should be an issue with him but apparently the only thing that matters is being king.
Inflation will be tamped down as more people are dying off.
chairman mao zeDon will be watching Walmart. what could go wrong on his expectations.
As the last elections show, inflation expectations matter a lot to politicians. Inflation expectations mean I might be getting poorer in the future. So stock up where I can and save where I can’t. And vote the other party in.
The economy would be sooooo much worse if Democrats were in power.
I’m hoping the current events bring us to some kind of new leadership pitch, perhaps reflecting the least stupid of both parties in recent decades.
Expectations matter to me.
I expect volatility in markets, and I plan to take advantage.
I expect the dollar to continue to decline in value over time. So more inflation.
I expect science, technology and innovation to keep advancing, making us more productive.
I expect the economy to grow in the long term, thanks largely to science, technology and innovation.
I plan to keep focusing on my health, wealth and happiness, because what I do, impacts my life far more than what politicians do.
more stock picks PopDave. please. thanks in advance. i like NTB
TIMEX keeps on ticking
thanks. what’s with the cash flow?
Not sure, time will tell. Everyone needs a watch sometime, somewhere.
Sure. I was heavily focused on oil names for a couple of years. Now I am heavily focused on natural gas names.
Peyto Exploration, Nuvista Energy, Arc Resources, Tourmaline.
I have large core positions in each, and I also trade them daily.
I sold all of my Nat Gas and Oil company stocks before the inauguration because I thought the markets were saturated with oil and gas. They are finding petroleum everywhere and floating storage and processing facilities are bringing more to the market every day. Plus trump is soft on Russia and Iran so they are disregarding the sanctions.
I’m looking for another VIX play.
The Ruble has been a great play and is up 30% since Jan 1. Thank the Donald and his emulation of Putin for that!
Enjoy and thanks for all the great posts!
On the topic of inflation expectations, I think Mish has it completely wrong. Every central bank’s dream and ultimate goal is to get to a point where inflation expectations don’t matter. In fact, price stability is often defined as a situation where inflation expectations don’t matter. The point of the definition is that people in this case believe that deviations of inflation from the central bank’s target are going to be transitory and not persistent. That’s exactly what the Fed has pretty much achieved since Volcker’s disinflation shock. And I doubt that many participants on this blog have ever lived in a monetary regime where inflation expectations matter on a daily basis. It’s a completely different ball game! For me, one of the worst aspects of Trump is that he is working very hard to make inflation expectations great again.
Excellent post Mish. I’ve been in the higher inflation camp for some time now because of demographic issues. Here’s a cool experiment anyone can do. The federal reserve has 300 PhD’s working on papers. You can search for them at the link below. I did a thought experiment and picked a few key words.
https://www.federalreserve.gov/publications.htm
Your query for “interest rate” matched 94883 documents.
Your query for “inflation” matched 18401 documents.
Your query for “demographics” matched 2530 documents.
Your query for “productivity” matched 149 documents.
Your query for “stagflation” matched 114 documents.
There are almost 100k documents on interest rates, 18k on inflation and only 2530 on demographics. I don’t know how long the archive search goes back but I assume forever so in the 100+ years of the Fed, only 2530 documents related to the most pressing and core issue of an economy: demographics.
We have an aging population, too few babies being born, and ballooning social programs. Mathematically, this won’t end well and it won’t end well soon.
If the Fed wants to understand inflation expectations, it is researching in the wrong place.
Great Expectations! Good novel, terrible forecaster, shows the power of media forming public opinion. Excellent piece. As far as Fed and bubbles go, it could very well be that when the Fed is blowing asset bubbles, they are too close to its very nose until poof, as everyone says, what a beautiful bubble! Where did it come from? Magic!
Zoomers should get two operations at once to beat the price rise. Transition to the other sex and then change right back. Think of the savings.
Checks all the boxes to get into the most prestigious colleges and corps.
That is why I always list myself as a black lesbian immigrant transvestite.
Five wins in one hire (lesbian counts for two: female & queer).
Tariffs Won’t Reindustrialize America. Here’s What WillTo revive manufacturing the US needs to borrow from China’s playbook.
To Bring Manufacturing Back to the US, Copy China’s Playbook – Bloomberg (archive.ph)
True but we don’t have the money anymore. We are spending it on all this crap. Trump should have reached across the table to China and peacefully asked for help and advice. Instead, he would rather blame them and start wars everywhere.
What wars?
I find it hilarious that commenters on this forum and others make assertions like this with obviously zero evidence.
Trump sent multiple carrier groups to go to war against Yemen and had to throw in the towel after two overpriced jets “accidentally rolled off the carriers”.
And Im guessing a lowering of the USA’s credit rating will matter also ….
It won’t matter until it matters, but then it will matter a whole lot….
Oboy, linear, and then exponential.