US Consumer Inflation Expectations Soar in January on Tariff Fears

In January 2025, consumer inflation expectations in the United States surged to their highest levels since the COVID-19 pandemic, driven by concerns over President-elect Donald Trump's proposed tariffs and immigration policies. The University of Michigan's survey revealed that consumers' one-year inflation expectations jumped to 3.3% in January, the highest level since May 2022, from 2.8% in December. Long-run inflation expectations also soared to 3.3%, the highest level since June 2008, from 3.0% in December.



The increase in inflation expectations is likely due to the uncertainty surrounding Trump's proposed tariffs on China, Canada, and Mexico, as well as his immigration policies. Retailers are also concerned about the potential impact of these tariffs on consumer prices, with some estimating that they could cost consumers an additional $2,500 to $7,600 a year per household. These tariffs could lead to higher prices for imported goods, which would ultimately be passed on to consumers. Additionally, the uncertainty surrounding these trade policies could lead to supply chain disruptions, further driving up prices.

Consumers' views of their personal finances improved about 5% in January, but their economic outlook fell back 7% for the short run and 5% for the long run. This divergence in views of the present and the future reflects easing concerns over the current cost of living but surging worries over the future path of inflation. Unlike some of the polarization of recent months, which had seen more positive responses among Republicans than Democrats, January's deterioration in economic expectations was seen across political affiliations.

The Federal Reserve has expressed concern about inflation and the impact that Trump's policies could have, indicating that they would be moving more slowly on interest rate cuts because of the uncertainty. The Fed's preferred gauge showed core inflation running at a 2.8% rate in November and 2.4% when including food and energy prices. The Fed target's inflation at 2%. However, most officials indicated that while they see inflation gravitating down to 2%, they don't forecast it happening now until 2027 and expect that near-term risks are to the upside.

In conclusion, the surge in consumer inflation expectations in January 2025 reflects the uncertainty surrounding Trump's proposed tariffs and immigration policies. As consumers anticipate higher prices in the future, they may become more cautious about making investments and delay major purchases, leading to a decline in overall consumer spending. Retailers are also concerned about the potential impact of these tariffs on consumer prices, which could lead to higher prices for imported goods and supply chain disruptions. The Federal Reserve has expressed concern about inflation and the impact that Trump's policies could have, indicating that they would be moving more slowly on interest rate cuts because of the uncertainty.