The University of Michigan’s gauge of consumer expectations for inflation over the next 12 months surged higher in early February, indicating that American households think inflation will go much higher over the coming year.
Consumers expect prices to rise 4.3 percent, a big increase from 3.3 percent in January. This is the highest expected inflation since November 2023 and only the fifth time in 14 years that the University of Michigan’s survey recorded a gain of one percent or more in a single month.
The gain was driven by increased expectations of rising prices among Democrats. Republican consumers expect zero inflation over the next year, slightly lower than a month ago. Independents expect a 3.7 percent increase, more than they did a month ago and up from around three percent at the end of 2024. Democrats, who expected around 2.5 percent inflation before the November election, now say they expect prices to rise 5.1 percent this year.
Longer-run inflation expectations, a measure of average expected price changes over the next five years, ticked up to 3.3 percent in February, up from 3.2 percent in the prior month. This too was largely driven by surging Democrat fears of inflation. The average expected inflation among Democrats rose to 4.2 percent, up from less than four percent a month ago and less than three percent prior to the election. Among independents, the longer-run expectation was unchanged. Among Republicans, the longer-run expected rate of inflation fell to 1.5 percent.
The partisan gaps in inflation expectations are now larger than they have been any time in the last four years.
The Federal Reserve watches inflation expectations closely. Many economists and Fed officials believe that a rise in inflation expectations can trigger a rise in actual inflation, although the evidence for this is mixed.
The University of Michigan’s index of consumer sentiment fell to 71.1, the lowest since July. Economists had expected a reading of 74. The index of current conditions fell from 74 to 68.7 and the index of expected economic conditions fell to 67.3 from 69.3.
“Consumer sentiment fell for the second straight month, dropping about 5 percent to reach its lowest reading since July 2024. The decrease was pervasive, with Republicans, Independents, and Democrats all posting sentiment declines from January, along with consumers across age and wealth groups,” said Joanne Hsu, the director of the consumer survey.
Expectations for personal finances fell about six percent from January, a decline seen across all political affiliations, reaching its lowest level since October 2023.
Surprisingly, the assessment of current conditions among Republicans fell from an index reading of 57.5 to 51.0, mostly reversing the gains following the November election. Expectations among Republicans was nearly unchanged, continuing to reflect a surge in optimism following the election. Expectations among Democrats, on the other hand, continued to deteriorate and the index’s level is now less than half of what it was pre-election. Expectations among independents slipped for the second month in a row.
