Fed’s growing inflation concerns as consumer confidence wanes—even among Trump supporters

(SeaPRwire) –   On the day Kevin Warsh officially took office as the Federal Reserve chair, the University of Michigan’s latest consumer sentiment report signaled a troubling trend regarding inflation expectations, presenting a significant challenge for the central bank.

The overall index declined for the third consecutive month, hitting a record low that surpasses the levels recorded during the 1970s oil crisis. Meanwhile, inflation expectations have climbed as the ongoing conflict in Iran and the continued blockage of the Strait of Hormuz sustain elevated energy costs.

Consumer projections for inflation over the next year rose to 4.8% this month, up from 4.7% in the previous month and higher than the 3.4% recorded in February, just before the conflict began. More concerning, however, is the rise in long-term inflation expectations, which reached 3.9% in May, up from 3.5% in April and well above the 2.8% to 3.2% range observed throughout 2024.

These near- and long-term outlooks have returned to levels seen late last year, when consumers were still struggling with the impact of President Donald Trump’s tariffs. Unlike his trade policies, however, the President lacks the unilateral authority to resolve the war in Iran and lower oil prices.

Although consumer sentiment data is often polarized by political affiliation, the recent spike in long-term inflation concerns was driven by Republicans and independents, suggesting that even the President’s base is skeptical of his ability to curb inflation in the near term.

In fact, long-term inflation expectations among Republicans have more than doubled since February 2025, shortly after Trump’s return to the White House.

“Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run,” stated Joanne Hsu, director of the Surveys of Consumers, in the University of Michigan report.

This shift in sentiment risks fueling further inflation, particularly if employees begin demanding higher wages to compensate for anticipated price increases.

For central bankers, this creates a nightmare scenario where persistent inflation leads consumers to lose confidence that price growth will eventually stabilize.

The Fed has previously cited well-anchored long-term inflation expectations as a justification for avoiding rate hikes, but that perspective is now changing.

Al Drago/Bloomberg via Getty Images

Shortly before the University of Michigan survey was released, Fed Governor Chris Waller echoed these concerns during a speech in Germany.

After advocating for more aggressive rate cuts last year amid cooling labor data, Waller has shifted his focus, noting that he is now more preoccupied with inflation than with the labor market, which has shown signs of stabilization.

While the Fed typically ignores short-term price shocks, Waller explained that a recurring series of such events can alter consumer psychology.

“If people do not know the true inflation generating process and see a sequence of positive price shocks, they may infer that the next price shock is more likely to be positive than negative,” he noted. “This view can lead them to raise their inflation expectations even though they may also believe the recent shocks are transitory.”

Currently, consumers are dealing with the impact of rising oil prices, following a period of price hikes driven by Trump’s tariffs last year.

While the administration eventually scaled back its most aggressive rates and the Supreme Court invalidated its global levies, Trump has already begun preparing a new set of duties to replace those deemed unconstitutional.

Waller noted that the Fed was within a quarter of a percentage point of its 2% inflation target last April, just before the implementation of the President’s tariffs.

Nevertheless, the Fed has struggled to meet its inflation goal since the pandemic, and the fact that consumers have endured higher prices for several years has fostered a belief that the era of low inflation has concluded.

“If I believe inflation expectations start to become unanchored, I would not hesitate to support an increase in the target range for the federal funds rate,” Waller stated. “But at this point that action is premature. It is time to simply sit and watch how the conflict and the data evolve.”