U.S. Consumer Sentiment Falls as Inflation Expectations Rise

American consumers are showing renewed caution. The University of Michigan’s preliminary August survey revealed that consumer sentiment fell for the first time in four months, while inflation expectations edged higher amid ongoing concerns about tariffs and economic uncertainty.

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The headline sentiment index slipped to 58.6 in August, down from 61.7 in July, according to data published Friday. At the same time, short-term inflation expectations reversed last month’s improvement. Consumers now anticipate prices will rise at an annual rate of 4.9% over the next year, up from July’s reading. Longer-term expectations covering the next five to ten years held at 3.9%.

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Both figures came in weaker than economists had projected in a Bloomberg survey, signaling that inflation worries remain stubborn despite recent signs of cooling.

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“Consumers continue to expect both inflation and unemployment to worsen going forward,” said Joanne Hsu, the survey’s director, in a statement. The poll was conducted between July 29 and August 11.

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Recent labor market data adds context to these concerns. Job growth has slowed notably over the past few months, and about 62% of consumers now expect unemployment to rise within the next year up from the previous survey.

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Another report from the University of Michigan revealed that 58% of consumers plan to reduce spending this year as they prepare for higher costs. Respondents said they intend to scale back on big-ticket items like cars, household goods, and dining out.

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“Many consumers shared during interviews that worries about high prices have resurfaced this month after easing somewhat earlier in the summer,” Hsu noted.

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The group’s measure of buying conditions for durable goods dropped to its lowest point in a year, underscoring a pullback in discretionary spending.

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Interestingly, separate government data released earlier Friday showed U.S. retail sales rose for a second straight month in July, supported by steady demand across multiple categories. This suggests that while sentiment is softening, actual consumer spending hasn’t fully reflected those concerns yet.

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The current conditions index, which gauges how consumers feel about the economy today, fell to 60.9, its weakest level in three months. Meanwhile, the expectations index, which reflects the outlook for the months ahead, slipped to 57.2.

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Nearly one-third of respondents expect interest rates to decline within the next year, but opinions are sharply split along political lines. According to the report, Republicans are significantly more likely to predict falling borrowing costs than Democrats and the gap between the two groups has reached the widest level on record.

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What This Means for Investors?

For investors, these numbers highlight a key contradiction: consumer confidence is dipping, yet spending remains resilient in some areas. Persistent inflation expectations could complicate the Federal Reserve’s path to rate cuts, while uncertainty around tariffs and employment trends adds another layer of risk.

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