Consumers aren't just upset about gas prices. They're starting to expect a future where prices keep climbing - and that's a much bigger problem.
The University of Michigan's consumer sentiment index hit 44.8 in May, the lowest level the survey has ever recorded. The previous bottom came in June 2022.
Sentiment is the headline. The inflation expectations are the story.
Americans now expect prices to rise 4.8% over the next year, up from 4.7% last month and from 3.4% in February before the U.S.-Iran war started. That jump is what's worrying the Fed.
The longer-term number is even more telling. Longer-term inflation expectations climbed to 3.9% from 3.5% in April.
Fed officials usually shrug off short-term spikes, but they get nervous when consumers start expecting inflation to stick.
Fed Governor Christopher Waller said as much on Friday. He called the move in one- to five-year inflation expectations "concerning" - a polite Fed word for "we have a problem."
The new May reading also sits just below the previous record trough from June 2022, which means consumer mood has fully retraced the pain of the post-pandemic inflation peak. Joanne Hsu, who runs the survey, said sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz kept gasoline prices climbing.
Market Briefs breaks down what numbers like this actually mean for your portfolio in five minutes a day - and you get a free investing masterclass when you sign up.
Inflation expectations are a self-fulfilling thing. If shoppers think prices will keep rising, they buy now, workers ask for bigger raises, and companies raise prices to cover those raises.
Round and round it goes.
That's why bond markets are getting jumpy. The 30-year Treasury yield - the interest rate the U.S. government pays on a 30-year bond - just hit its highest level since before the 2008 financial crisis, while the 10-year sits at a one-year high.
Higher yields mean higher costs for mortgages, car loans and business borrowing - all of which slow the economy.
Joanne Hsu added that this round of pessimism is different. Consumers told the survey they're worried inflation will "increase and proliferate beyond fuel prices, even in the long run" - meaning shoppers aren't just bracing for one bad summer.
Joanne Hsu, who runs the University of Michigan survey, said consumers are worried inflation will "increase and proliferate beyond fuel prices." That's the line the Fed is staring at.
Fed officials had been hinting at rate cuts earlier this year, but most of that talk is now gone. Markets expect the Fed to hold rates through 2026, with some traders pricing in hikes for early 2027.
Investors looking for shelter are paying more attention to ideas like recession-proof sectors and short-duration bonds.
The Iran war could end tomorrow. The expectation that inflation lasts won't.
Sign up for Market Briefs for daily reads on what's moving markets - plus a free 45-minute investing course thrown in as a welcome gift.
