U.S. Michigan consumer long-term inflation expectations soar to the highest level since 1995

Data released on Friday showed that, according to the final data from the University of Michigan for February, consumers expect prices to rise at an annual rate of 3.5% over the next five to ten years, the highest level since 1995. Meanwhile, consumer confidence remains low.

The final consumer confidence index for the U.S. in February from the University of Michigan was 64.7, compared to an expectation of 67.8 and an initial value of 67.8, down from 71.1 in January. All sub-indices declined. Among them, the final current conditions index for February was 65.7, with an expectation of 68.5 and an initial value of 68.7, down from 74 in January; the final expectations index was 64, with an expectation of 67.4 and an initial value of 67.3, down from 69.3 in January.

The decline in confidence is consistent across all groups, regardless of age, income, or wealth.

In terms of inflation expectations, which are closely watched by the market, the final one-year inflation expectation for February was 4.3%, the highest since November 2023, matching expectations and the initial value of 4.3%. The final five-year inflation expectation for February was 3.5%, the highest since April 1995, and also the largest month-on-month increase since May 2021, with expectations and initial values at 3.3%.

The latest survey indicates that U.S. consumers' inflation expectations have broken out of the range fluctuations seen in recent years. For a considerable time, the five-year inflation expectations from Michigan were generally in a narrow range of 2.9%-3.1%. In June 2022, when U.S. inflation peaked in this cycle, the initial value of this inflation expectation reached 3.3%, the highest since 2008. The latest long-term inflation expectation for February 2025 is already above the levels seen in the two years prior to the pandemic.

Previously, due to optimistic expectations regarding the Trump administration's policies, Republican voters had pushed the consumer confidence index up after the November elections last year. However, since the beginning of this year, the confidence index has fallen again, partly due to concerns about inflation pressures from tariffs. As the outlook for trade conflicts affects American consumers' expectations for future prices, inflation expectations have once again become a focal point for the market, showing significant uncertainty.

The potential impact of tariffs on consumer prices may have significant implications for the Federal Reserve's interest rate policy. Federal Reserve officials have indicated that they are not in a hurry to further cut interest rates, as the process of declining inflation has stalled. The explosion of U.S. inflation expectations is a sign of loosening long-term inflation expectations; the Michigan inflation expectation data from June 2022 prompted aggressive rate hikes by the Federal Reserve, and subsequently, inflation expectations fell, significantly alleviating concerns about potential loss of control.

Joanne Hsu, director of the consumer survey at the University of Michigan, stated:

If consumers continue to increase spending to avoid significant price increases expected in the future, then higher inflation expectations may become self-fulfilling.

Additionally, more than half of consumers expect the unemployment rate to rise in the coming year, the highest proportion since 2020.

People's assessments of purchasing conditions for big-ticket items have also declined. The purchasing conditions for durable goods fell by 19%, primarily due to concerns about imminent price increases triggered by tariffs In February, personal financial expectations and short-term economic outlook both fell by nearly 10%, while the long-term economic outlook declined by about 6%, reaching the lowest level since November 2023.

The decline in the consumer confidence index was primarily driven by a drop in sentiment among Democrats and independent voters. The confidence of Democrats is at its lowest point since June 2008. The divergence in inflation expectations among different political parties has reached extreme levels.

Although long-term inflation expectations in the U.S. have skyrocketed, the decline in U.S. Treasury yields has widened. Earlier released Markit PMI data showed that the U.S. services PMI preliminary value unexpectedly fell into recession in February. The yield on the 10-year U.S. Treasury bond hit a daily low of 4.4526%, with an overall decline of more than 5 basis points during the day; the yield on the 2-year U.S. Treasury bond hit a daily low of 4.2278%, with an overall decline of more than 4 basis points during the day