Tariffs angst sinks US consumer sentiment, boosts inflation expectations

US consumer sentiment deteriorated sharply in April and 12-month inflation expectations surged to the highest level since 1981 amid unease over escalating trade tensions that have roiled financial markets and raised the risk of a recession.

The University of Michigan Surveys of Consumers said on Friday that the slump in sentiment to the lowest level in nearly three years was "pervasive and unanimous" across age, income, education, geographic region and political party affiliation.

The jump in inflation expectations poses a dilemma for Federal Reserve officials, who have argued they remain anchored. President Donald Trump this week ratcheted up trade tensions, hiking duties on Chinese goods to 125 percent, even as he delayed reciprocal tariffs on other trade partners for 90 days.

Beijing on Friday retaliated with a 125 percent tariff of its own. Trump has maintained a 10 percent blanket duty on almost all US imports as well as a 25 percent tariff on motor vehicles, steel and aluminium, leaving businesses and consumers bracing for a burst in inflation.

"Consumers have spiralled from anxious to petrified," said Samuel Tombs, chief US economist at Pantheon Macroeconomics.

The Consumer Sentiment Index dropped to 50.8 this month, the lowest reading since June 2022, from a final reading of 57.0 in March. Economists polled by Reuters had forecast the index falling to 54.5.

The decline in sentiment was more pronounced among Democrats and Independents. Morale was also down among Republicans.

The survey was concluded on Apr 8, before Trump's latest moves on import duties. Apart from causing apprehension about inflation, the White House's tariffs campaign has wiped out billions of dollars from retirement accounts and heightened uncertainty for businesses, which could hurt the labour market.

The survey showed the share of consumers expecting unemployment to rise in the year ahead increased for the fifth straight month to the highest level since 2009, when the economy was in the midst of the Great Recession.

"This lack of labour market confidence lies in sharp contrast to the past several years, when robust spending was supported primarily by strong labour markets and incomes," said Surveys of Consumers Director Joanne Hsu.

Consumers' 12-month inflation expectations soared to 6.7 percent, the highest reading since 1981, from 5.0 percent in March. The jump, which marked four straight months of increases of 0.5 percentage points or more, was across party affiliation.

Over the next five years, consumers saw inflation running at 4.4 percent. That was the highest level since June 1991 and was up from 4.1 percent in March. The persistent rise in inflation expectations could be problematic for US central bank officials.

FINANCIAL MARKETS TURMOIL

Some economists expect the Fed to delay resuming cutting interest rates until later this year after pausing its easing cycle in January. Financial markets expect a rate cut in June.

"The rise in long-term inflation expectations should catch the Fed's attention," said Ryan Sweet, chief US economist at Oxford Economics. "Keeping inflation expectations anchored is critical for the Fed and one reason we don't anticipate the central bank cutting interest rates until December."

Stocks on Wall Street rose in volatile trade. The dollar slumped to a decade low against the Swiss franc and was the weakest versus the euro in three years. The yield on the benchmark US 10-year Treasury rose and was on track to post the biggest weekly increase in more than 23 years.

Other data from the Labour Department's Bureau of Labour Statistics on Friday showed the producer price index for final demand dropped 0.4 percent in March, the first decline since October 2023, after an upwardly revised 0.1 percent gain in February. The data has, however, been superseded by the trade wars.

Economists had forecast the PPI rising 0.2 percent after a previously reported unchanged reading in February. In the 12 months through March, the PPI increased 2.7 percent after advancing 3.2 percent in February.

A 0.9 percent drop in goods prices accounted for more than 70 percent of the decrease in the monthly PPI. Last month's decline in goods prices was the largest since October 2023 and followed a 0.3 percent gain in February. Goods prices were depressed by an 11.1 percent tumble in the cost of petrol, amid worries that the tariffs tit-for-tat would slow global economic growth.

Wholesale food prices dropped 2.1 percent amid decreases in eggs, beef and veal as well as fresh and dry vegetables.

But prices for steel mill products jumped 7.1 percent, likely boosted by tariffs. Excluding the volatile food and energy components, goods prices increased 0.3 percent for a second straight month. The anticipated surge in inflation could, however, be tempered somewhat by softening domestic demand, evident in March's consumer price report that showed monthly declines in airline fares as well as hotel and motel room prices.

That was replicated in the PPI report. Wholesale airline fares tumbled 4.0 percent after being unchanged in February, while the cost of hotel and motel rooms dropped 1.2 percent.

There have been reports of Canadians boycotting travel to the U.S. Trump has often mused about annexing Canada.

The declines more than offset moderate increases in portfolio management fees and healthcare costs, resulting in services prices falling 0.2 percent after being unchanged in February.

Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among the components that go into the calculation of the core Personal Consumption Expenditures price index, one of the inflation measures tracked by the Fed for its 2 percent target.

Economists estimated the core PCE price index rose 0.1 percent in March after jumping 0.4 percent in February. That would slow the annual increase in core inflation to 2.6 percent from 2.8 percent in February.

"Although the core PCE estimates are a welcome relief, we don't think we can extrapolate much from this," said Pooja Sriram, an economist at Barclays. "The tariff regime in place in March was relatively benign compared with the current circumstances, which implies that price pressures may only now start to build."