Inflation outlook tumbles to pre-tariff levels in latest University of Michigan survey

The latest University of Michigan Survey of Consumers for July has revealed that consumers’ concerns about tariff-induced inflation have eased, although there is still apprehension about potential price hikes in the future. The overall sentiment increased slightly by 1.8% from June to 61.8, aligning with expectations and reaching its highest level since February.

Both current conditions and future expectations showed monthly gains in the survey. However, when it comes to inflation, the outlook for both the one-year and five-year horizons has decreased to their lowest levels since February, before President Donald Trump’s tariff announcement on April 2.

The one-year inflation forecast dropped to 4.4% from 5% in June, a significant decrease from the peak of 6.6% in May. Similarly, the five-year outlook slid to 3.6%, down 0.4 percentage points from the previous month. Despite these declines, consumers still perceive a considerable risk of inflation increasing in the future.

According to Joanne Hsu, the survey director, the current inflation expectations are the lowest since February 2025, but they remain higher than they were in December 2024. This indicates that consumers are still wary of potential inflationary pressures, although they believe that any tariff-induced inflation will be temporary.

Chief economist at LPL Financial, Jeffrey Roach, noted that consumers’ expectations of inflation are crucial for the Federal Reserve’s decision-making process. The survey results suggest that consumers believe conditions will improve by the end of 2025, providing an encouraging trajectory for inflation expectations.

The concerns about inflation peaked when President Trump implemented tariffs on various products, but recent announcements of tariffs on individual items like copper have raised concerns about future price hikes. Despite these worries, the survey results show that consumer sentiment remains below long-term averages, with the headline sentiment index down 6.9% from a year ago and 16% from December.

While the expectations reading has fallen by 14.8% from July 2024, the current conditions index has shown a 6.5% increase. Overall, the survey indicates that consumers are cautiously optimistic about the future economic landscape, with hopes for a more stable and predictable inflation environment in the coming months.