I see little to no use for this very volatile index as a recession indicator, but the market pays attention to it. So let’s discuss the numbers.

Consumers’ Mood Sours

The Wall Street Journal reports Consumers’ Mood Sours in March With Gloomier Economic Outlook

The survey’s headline index came in at 57 this month, the lowest level since 2022. That marked a decline from 64.7 in February and 79.4 a year ago. Data published earlier this month had shown a preliminary reading of 57.9.

Two-thirds of consumers said they expect higher unemployment in the next year, the highest reading since 2009.

Most of the concern in the survey centered on a darkening outlook for the economy’s path ahead. The survey’s index of consumer expectations fell by 18% from February. On the other hand, families’ assessments of the current state of the economy slipped by just 2.9% from last month.

The potential for higher inflation remains a key concern among people surveyed by the University of Michigan. Respondents said in March they think prices will rise by 5% over the next year, up from 2.8% expected inflation at the end of 2024.

“As of now, I would call it an economy going at stall speed,” said Nancy Lazar, chief economist at Piper Sandler, an investment bank. 

The biggest risk, she said, is the fog around economic policy. “The longer the uncertainty remains high, the higher the odds of things deteriorating,” Lazar said.

Tariffs Drive Price Expectations

Bloomberg reports US Consumer Sentiment Sinks as Tariffs Drive Price Expectations

US consumer sentiment tumbled this month to a more than two-year low and long-term inflation expectations jumped to a 32-year high as anxiety over tariffs continued to build.

Consumers expect prices to rise at an annual rate of 4.1% over the next five to 10 years, the data released Friday showed. That’s the highest since February 1993 and above the 3.9% preliminary reading. They saw costs rising 5% over the next 12 months, the highest since 2022.

While the University of Michigan’s long-term inflation expectations have soared this year, other measures have remained steady. The outlook for inflation three years and five years out, according to a Federal Bank of New York consumer survey, was stable last month.

During a press conference this month, Fed Chair Jerome Powell largely dismissed the Michigan survey as an outlier for longer-run expectations, and other policymakers have since echoed his remarks.

US Consumer Sentiment Plunges Over Inflation Concerns

(Click on image to enlarge)

Inflation Expectations Don’t Matter

Every FOMC meeting the Fed Chair, currently Jerome Powell, makes a fool of himself with nonsensical discussions on inflation expectations.

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.

Businesses Inflation Expectations

Grocery stores can’t do anything at all, for obvious reasons.

Manufacturers can order ahead, and did to beat tariffs, but now they now have big inventories.

How many cars can dealers fit on their lots? And what if consumers don’t buy?

Other than a few month’s inventory, assuming storage space, but at a cost and risk, businesses cannot do much either. If they do it’s a one-time impact of pushing supplies forward. Then what?

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 last 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)

Do Inflation Expectations Matter?

I have discussed inflation expectations at least ten times over the years.

Here’s one from 2023 when I tangle with Bill Fleckenstein regarding the question How Do Inflation Expectations Impact Wages and Future Consumer Inflation?

Fleckenstein is an inflation expectations believer.

Phillip’s Curve Nonsense

Also see Yet Another Fed Study Concludes Phillips Curve is Nonsense

Despite the Fed’s own studies, every Fed president still believes in the Phillip’s Curve and Inflation Expectations.

They have been trained to believe nonsense.

Inflation and media reporting of it drives expectations, not the other way around.

Asset Price Expectations

Asset price expectations are another matter. That’s why we have bubbles and crashes.

People will buy houses and stocks if they think prices will rise. People don’t by stocks if they think they will fall.

But asset prices are not in either the CPI or PCE price indexes. Fostering asset prices bubbles is a constant mistake by the Fed.

The one place expectations do matter is in asset bubbles, and it’s the only place the Fed doesn’t look!

Related Posts

February 14, 2025: Retail Sales Crash – Did the Consumer Finally Throw in the Towel?

The Census Department shows huge across-the-board declines in multiple categories, down 0.9 percent overall.

March 17, 2025: Retail Sales Barely Rise in February, They’re Negative Factoring in Revisions

Retail sales had another poor month in February. It’s very recession looking.

March 28, 2025: Real Disposable Personal Income Up 0.5%, Real Spending Up 0.1% in February

Consumers seem to be hunkering down in February as income outpaces spending.

If people are rushing to beat price increases, why are retail sales anemic?

Recap: Consumer inflation expectations are meaningless. Asset price expectations aren’t.

The Fed monitors the meaningless, and fosters bubbles where it matter.

More By This Author: