WASHINGTON, May 19 (Reuters): US consumer sentiment deteriorated further in May, with one-year inflation expectations soaring to levels last seen in late 1981 amid escalating fears over the economic impact of President Donald Trump's trade policy.
The University of Michigan's Surveys of Consumers on Friday showed a significant decline in morale among Republicans, suggesting that even Trump's base was becoming concerned with the president's sweeping tariffs, which this week led retail giant Walmart to warn that it would start raising prices at the end of month because of increased costs from import duties.
It was the first time that sentiment dropped among Republicans since Trump's November 5 electoral victory. The continued slump in overall sentiment and jump in inflation expectations suggested a retrenchment in consumer spending was probably underway that could temper economists' expectations for a rebound in economic growth this quarter.
The economy contracted in the first quarter for the first time in three years amid a flood of imports as businesses tried to beat the higher costs associated with tariffs. Retail sales were almost flat in April.
"The consumer is plainly worried and reading between the lines it is not just price increases that are worrying, it is the fact that many goods may be impossible to find as the reduction in port activity means shortages could develop within months," said Christopher Rupkey, chief economist at FWDBONDS.
"The outlook continues to darken and one wonders how long this can continue before the economy actually slips over the edge into recession."
The University of Michigan's consumer sentiment index dropped to 50.8 this month, the lowest level since June 2022, from a final reading of 52.2 in April. Economists polled by Reuters had forecast the index would rise to 53.4.
Sentiment dropped 7 per cent among Republicans, offsetting an improvement among independents. The mood remained gloomy among Democrats.
The survey was conducted between April 22 and May 13, wrapping up two days after the US and China de-escalated their trade war. Duties on Chinese imports were slashed to 30 per cent from 145 per cent for 90 days as part of the deal reached last weekend by Washington and Beijing.
The University of Michigan said the initial reaction mirrored the minor improvement in sentiment seen following the delayed implementation in April of Trump's country-specific duties until July. Three companies have gone bust and are being investigated for fraud. The co-owner of one firm involved has died by suicide.
"Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60 per cent in April; uncertainty over trade policy continues to dominate consumers' thinking about the economy," said Joanne Hsu, the Surveys of Consumers director. "Consumers continue to express somber views about the economy."
Consumers' 12-month inflation expectation soared to 7.3 per cent, the highest level since November 1981, from 6.5 per cent in April. Both Democrats and Republicans anticipated higher near-term inflation. The jump pointed to higher prices in the months ahead despite benign consumer prices in April, which economists attributed to businesses still selling inventory accumulated ahead of tariffs.
Auto manufacturers also have announced price increases, and economists expect inflation to pick up by the middle of this year. Long-run inflation expectations increased to 4.6 per cent in the University of Michigan data, the highest level since March 1991, from 4.4 per cent in April amid a large jump among Republicans. Rising inflation expectations could complicate matters for the Federal Reserve as it weighs its next monetary policy move.
"The key idea to remember here is that inflation expectations are the primary transmission mechanism, along with external retaliation, that turns tariffs into a sustained increase in the price level or inflation," said Joseph Brusuelas, chief economist at RMS US. "The idea that the Federal Reserve is going to hike rates anytime soon should be summarily dismissed."
Fed Chair Jerome Powell warned on Thursday that "we may be entering a period of more frequent, and potentially more persistent, supply shocks - a difficult challenge for the economy and for central banks. The US central bank left its benchmark overnight interest rate in the 4.25 per cent-4.50 per cent range earlier this month.
Higher inflation was flagged in a separate report from the Labor Department's Bureau of Labor Statistics that showed prices for imported capital goods jumped 0.6 per cent in April, while those of consumer goods excluding motor vehicles increased 0.3 per cent. Overall import prices, which exclude tariffs, gained 0.1 per cent after falling 0.4 per cent in March.
