Inflation Expectations Surge in Two Distinct Consumer Confidence Surveys

57% of consumers say high prices are eroding their personal finances.

Record Low Consumer Sentiment

The University of Michigan Consumer Sentiment Index fell to a record low in May.

Sentiment is now just below the previous historical trough seen in June 2022. The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month. Lower-income consumers and those without college degrees posted particularly strong sentiment declines; these groups are more sensitive to increases in the cost of gas and other essentials. Independents and Republicans saw decreases in sentiment, with both groups reaching their lowest readings of the current presidential administration. Meanwhile, sentiment of Democrats was little changed from last month. Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.

Year-ahead inflation expectations inched up from 4.7% last month to 4.8% this month. The current reading substantially exceeds the 3.4% reading seen in February 2026 prior to the start of the Iran conflict, along with all 2024 readings. Long-run inflation expectations climbed from 3.5% in April to 3.9% in May, notably higher than the 2.8% to 3.2% range seen in 2024. This month’s increase in long-run expectations reflects sizable jumps among independents and Republicans. For the latter group, long-run inflation expectations are currently more than double their February 2025 reading on a monthly basis.

US Consumer Confidence Edged Downward in May

Not to be confused with the University of Michigan survey, the Conference Board reports US Consumer Confidence Edged Downward in May

Conference Board Inflation Expectations

The Median Inflation Expectation is over five percent.
The Average Inflation Expectation is over six percent.

Spending Expectations

• Two-thirds of consumers cited cutting back on spending overall due to rising prices, as of May
• Most who are cutting back bought fewer items and delayed expensive purchases
• Many who said they are delaying purchases of items they want rather than need, plan to buy them in the next six months
• Consumers planned to economize on clothing and footwear, hobby items, and games/toys

Inflation Expectations Don’t Matter

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.

You can’t do much about electricity bills, home insurance, auto insurance, or gasoline.

Up and down the line there is not a damn thing you can do about 90 percent of what you buy. Rent alone is 35 percent of the CPI.

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

Inflation Expectation Theory and Practice

The widely held view is that if inflation expectations get entrenched prices spiral higher.

It’s a good thing for the Fed they don’t matter because they are getting entrenched.

And note the survey responses. People are trying to spend less. But that hard when prices are going up.

Meanwhile, credit stress mounts.

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