Consumer Sentiment Crashes To 5-Year Lows As Inflation Fears Reach 1981 Levels

The University of Michigan’s May consumer survey delivered a jarring message to Wall Street and policymakers: sentiment among American consumers has plunged to the lowest levels since June 2020, while expectations for inflation surged to heights last seen during the early 1980s.

The preliminary Consumer Sentiment Index dropped to 50.8 in May, down from 52.2 in April and missing economists' forecasts of 53.4. The gauge is now 27% lower than it was a year ago, signaling deepening anxiety among households despite the recent 90-day pause on tariffs.

Expectations Sink To 1980 Lows, Inflation Fears Echo 1981

The subindex for Current Economic Conditions declined to 57.6 from 59.8 in April, while the Consumer Expectations subindex – a measure of forward-looking sentiment – dipped further from 47.3 to 46.5.

That reading marks the weakest since May 1980, worse even than the worst moments of the 2008 financial crisis and the early Covid-19 pandemic.

"Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April," said Joanne Hsu, director of the Surveys of Consumers. "Uncertainty over trade policy continues to dominate consumers' thinking about the economy."

The data was gathered between April 22 and May 13, closing two days after the White House announced a trade truce with Chine, leaving room for potential revision of the data.

“The final release for May will reveal the extent to which the pause on some China tariffs leads consumers to update their expectations,” Hsu added.

Year-ahead inflation expectations jumped sharply from 6.5% in April to 7.3% in May, the highest reading since November 1981.

Long-term inflation expectations over the next five years also climbed to 4.6%, up from 4.4%, reaching levels last seen in March 1991.

Markets react: Dollar Rises, Equities Erase Gains

Investors interpreted the inflation surge as a headwind to future interest rate cuts.

The U.S. dollar, which had opened weaker, reversed course after the data. The Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), which tracks the dollar's strength, climbed 0.2% by 10:15 a.m. ET.

Stocks turned mixed as inflation fears resurfaced.

The S&P 500 erased early gains, while the Dow Jones Industrial Average and small-cap benchmark Russell 2000 both flipped to the red. Only the Nasdaq 100 managed to stay positive, up 0.2% at last check.

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Image created using artificial intelligence via Midjourney.