Consumers Are Getting Gloomier about Inflation, and the Fed Should Probably Pay Attention

Axios, CNN, CNBC, Reuters, Bloomberg, Market Watch contributed to this report.

Americans are in a pretty sour mood about the economy, and the latest consumer survey says inflation fears are not easing up – they are getting worse.

The University of Michigan’s consumer sentiment index sank to a fresh all-time low in May, dropping to 44.8 from 49.8 in April. That is a rough reading by any standard, but the bigger warning for the Federal Reserve is what happened to inflation expectations. People now see long-run inflation at 3.9%, up from 3.5% last month and well above the Fed’s target.

The mood has been dragged down by the same old pressure points, only louder now: high prices, stubborn affordability problems and, lately, the Iran war and the jump in gas prices that came with it. Joanne Hsu, who runs the survey, said cost of living is still the main thing on people’s minds. More than half of consumers said high prices were eating into their finances.

The pain is hitting hardest at the lower end of the income scale and among people without college degrees. That makes sense. When fuel, groceries and other basics get more expensive, there is less room to breathe if your budget is already tight.

The part the Fed will care about most is this: people are no longer just worried about gas. They are starting to think inflation could spread beyond the pump and stick around for longer than they hoped. That matters because once consumers believe prices will keep climbing, they start changing behavior – spending faster, asking for higher wages, and expecting businesses to keep raising prices.

So the economy is sending mixed signals. Jobs are still holding up, stocks are near records, and inflation is nowhere near the chaos of a couple years ago. But Americans do not seem impressed. Their view is still deeply negative, and right now the inflation story is doing most of the damage.