Consumer sentiment falls in May as Americans' inflation expectations jump after tariffs

U.S. consumers are becoming increasingly worried that tariffs will lead to higher inflation, according to a University of Michigan survey released Friday.

The index of consumer sentiment dropped to 50.8, down from 52.2 in April, in the preliminary reading for May. That is the second-lowest reading on record, behind June 2022.

The outlook for price changes also moved in the wrong direction. Year-ahead inflation expectations rose to 7.3% from 6.5% last month, while long-term inflation expectations ticked up to 4.6% from 4.4%.

However, the majority of the survey was completed before the U.S. and China announced a 90-day pause on most tariffs between the two countries. The trade situation appears to be a key factor weighing on consumer sentiment.

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

Inflation expectations are closely watched by investors and policymakers. Federal Reserve Chair Jerome Powell has said the central bank wants to make sure long-term inflation expectations do not rise because of tariffs before resuming rate cuts.

Even with the pauses on import levies against China and other countries, the effective tariff rate for goods entering the United States is still significantly higher today than it was before President Donald Trump's inauguration in January. Economists on both sides of the aisle mostly agree that tariffs could lead to a short-term rise in prices, though the extent of that increase and whether it would fuel long-term inflation remains unclear.

Recent inflation data has not shown a tariff bump, as both the consumer price index and producer price index for April came in below consensus estimates.

A final consumer sentiment index for the month is slated to be released on May 30, and will likely be closely watched to see if the tariff pause led to an improvement in sentiment.