Consumers long-run inflation views rise to highest since 1995

US consumers' expectations for long-term inflation rose to the highest rate in three decades on concerns President Donald Trump's tariffs will translate into higher prices.

Consumers expect prices will climb at an annual rate of 3.5% over the next five to 10 years, according to the final February reading from the University of Michigan. The rate is the highest since 1995, based on data compiled by Bloomberg. 

Partly as a result, the consumer sentiment index dropped to 64.7 from 71.7 in January — lower than analysts anticipated. All five components of the index deteriorated, including a decline in buying conditions for big-ticket items. And more than half of consumers in the survey expect the unemployment rate to rise over the next year, the highest since 2020.

Inflation expectations have taken renewed importance as the prospect of trade wars is weighing on the outlook for prices paid by American consumers. As a result sentiment has fallen this year, partly undoing a surge in the wake of Trump's election in November that was driven by enthusiasm among Republicans and overall expectations that inflation would ease.

Long-run inflation expectations are now higher than the two years that preceded the pandemic and "exhibit substantial uncertainty, particularly in light of policy changes under the new presidential administration," according to a separate report from the University of Michigan on inflation.

The uncertainty around tariffs and the potential impact on consumer prices may have implications for interest rates. Federal Reserve officials have signaled they're in no rush to cut rates further after progress on inflation stalled. Over the next 12 months, inflation expectations rose to 4.3%, in the survey. 

"If consumers continue to ramp up their spending to avoid large anticipated price increases, higher inflation expectations could become self-fulfilling," Joanne Hsu, director of the survey, said in a statement.

Economists, too, are anticipating higher inflation. A Bloomberg survey of analysts found an uptick in forecasts for the Fed's preferred inflation measure in the first quarter compared with a month ago.

Separate data out Friday showed a slowdown in business activity in February, dragged down by the service sector. And existing-home sales dropped for the first time since September last month, as the combination of high mortgage rates and prices sets a grim backdrop heading into the crucial spring selling season.

In the University of Michigan survey, current conditions gauge dropped to 65.7 from 75.1. Consumers' perception of their financial situation deteriorated.

The drop in the overall sentiment index was mainly driven by Democrats and political independents.