Jump in inflation expectations bad news for Trump, the Fed, and all Americans

The University of Michigan Consumer Sentiment Index for February indicated that consumers expect prices to stay high, at least to some degree. After nearly a half-decade of price hikes spurred by the COVID-19 pandemic, consumers expect inflation to climb at an annual rate of 3.5% over the next five to 10 years. That is well above the Fed’s preferred 2% level and is the highest such expected rate since 1995.

The survey’s director, Joanne Hsu, pointed out that long-range inflation expectations have increased quickly. She called it an “unusually large increase” over the past two months. The last time there was a surge this big was back in 2008 in response to oil price shocks.

That spells concern for the Fed.

“The reason why policymakers are concerned about inflation expectations is that people make decisions based on those expectations, and if left unchecked, it may become unanchored — high inflation expectations can become self-fulfilling,” Hsu told the Washington Examiner.

What’s more, broader expectations for personal finances and the short-run economic outlook both fell nearly 10% in February.

Mark Hamrick, senior economic analyst at Bankrate, told the Washington Examiner that this decline in sentiment and uptick in inflation expectations is being driven in part by Trump’s plans to levy tariffs against allies and adversaries alike.

One of the biggest arguments against tariffs is that they will put further pressure on inflation, which has plagued the U.S. for nearly four years now. The idea is that the costs from the tariffs are simply passed along to consumers through higher prices.

Still, Trump has been adamant about the use of tariffs, arguing that they are a way to compel companies to reshore manufacturing in the United States, helping the labor market and securing independence from foreign supply chains. Commerce Secretary Howard Lutnick pushed back on the notion of tariffs being inflationary during his confirmation hearing earlier this month.

“A particular product’s price may go up, but all of them — it is not inflationary; the two top countries with tariffs, India and China, have the most tariffs and no inflation,” he said. “It’s just nonsense that tariffs cause inflation. It’s nonsense.”

But Hamrick said tariffs should be of concern to those worried about inflation.

“With a seemingly never-ending series of either tariff threats or actual some imposition of tariffs, the public is right to be concerned about the possibly inflationary implications of that,” he said.

Hsu said the rising inflation expectations, in large part, are being driven by concerns about tariff policy.

“Consumers are really concerned that the developments of tariff policy do not bode well for consumer prices, and they’re really bracing for impact,” Hsu said.

And the data bear out the notion that news about tariffs is causing alarm among consumers. As part of the latest University of Michigan survey, about 40% of people spontaneously mentioned tariffs. That is an increase from 27% the month before and less than 2% before the election.

Hamrick also said part of the upward pressure on inflation expectations comes from the lived experience of consumers seeing how sticky inflation has proven to be over the past couple of years — even as the Fed drove interest rates up to historic levels to quash demand. He also blamed the “massive amount of uncertainty.”

Hsu pointed out that the current rash of rising inflation expectations is unlike the last time they jumped this much back in 2008. That is because, at the time, they could go down right away as oil prices fell. This time around, a lot of the concern is centered on tariff policy.

During the election cycle, Trump campaigned on the idea that then-President Joe Biden was to blame for inflation. Trump said repeatedly annual inflation would drop once he was back in the Oval Office. So, it could be bad politically for Trump and congressional Republicans if inflation stays stubbornly high or even increases.

And actual annual inflation, not just expectations, has been moving in the wrong direction the past few months.

Inflation rose to 3% for the year ending in January, the Bureau of Labor Statistics reported recently in an update to the consumer price index. It’s a warning that price pressures are stronger than thought and are a whole percentage point higher than what is considered healthy. January also marks the fourth month of increases.

Peter Loge, director of the George Washington University School of Media and Public Affairs, said Democrats are going to increasingly start accusing Trump of exacerbating inflation as a political tactic.

“Democrats are absolutely going to start blaming Trump,” he told the Washington Examiner.

The higher inflation prints and the recent uptick in inflation also put the Fed and Fed Chairman Jerome Powell in a tricky spot. That is because the Fed began lowering interest rates last year, much to the delight of investors, but now it has paused and is in wait-and-see mode given the hotter price growth.

The Fed has a dual mandate — keeping inflation around 2% and encouraging maximum employment. With inflation remaining sticky, the Fed won’t be able to let its foot off the gas on interest rates, and the labor market could end up taking a hit.

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“Let’s just say, when the Fed is looking at so many sources of uncertainty, it makes it difficult to know exactly what the right move is to make, and so that’s why they’re sort of sitting on their hands,” Hamrick said.

Most investors now don’t think the next interest rate cut will come until at least June, although there is a high degree of variability given the uncertainty, according to the CME Group’s FedWatch tool, which calculates the probability using future contract prices for rates in the short-term market targeted by the Fed.