WASHINGTON (Reuters) - U.S. consumers expect inflation to increase over the next 12 months and beyond, likely reflecting concerns that broad tariffs on imports pledged by President-elect Donald Trump's incoming administration could raise prices for households.
The University of Michigan's survey showed consumers' one-year inflation expectations jumped to 3.3% in January, the highest level since May, from 2.8% in December. That raised the 12-month inflation expectations above the 2.3%-3.0% range seen in the two years prior to the COVID-19 pandemic.
Long-run inflation expectations soared to 3.3%, the highest level since June 2008, from 3.0% in December.
"For both the short and long run, inflation expectations rose across multiple demographic groups, with particularly strong increases among lower-income consumers and Independents," said Surveys of Consumers Director Joanne Hsu.
In addition to imposing or massively raising tariffs on imports, Trump has also promised to deport millions of undocumented immigrants, policies that economists have warned would stoke inflation.
Anger over high prices swept Trump to victory in the Nov. 5 election. Trump promised on the campaign trail to lower prices.
The surge in inflation expectations added to labor market strength in reinforcing the message from the Federal Reserve about fewer interest rate cuts this year.
Economists expect the U.S. central bank will keep its benchmark overnight interest rate unchanged in the 4.25%-4.50% range through the first half of the year.
The Fed has lowered its policy rate by 100 basis points since launching its easing cycle in September. It last month projected only two quarter-point rate cuts this year compared to the four it had forecast in September.
Soaring inflation expectations factored into the 5.25 percentage points worth of hikes in the policy rate in 2022 and 2023. Concerns about higher prices are chipping away at consumer sentiment, which had soared in the aftermath of Trump's victory.
The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 73.2 this month, compared to a final reading of 74.0 in December.
"We see evidence in this survey that consumers expect tariffs to raise the prices of many types of goods," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.
"Reading between the lines, worries about the potential impact of some of Donald Trump's economic policies seem to be denting confidence too."
Separately, the LSEG/Ipsos Primary Consumer Sentiment Index dropped 3.2 points to 54.4 in January, after hitting a more than three-year high in December.
"The decline in sentiment is driven by diminished comfort making both major and household purchases, as well as
decreased confidence in investing in the future, and an uptick in the number that have lost their job," said Johnny Sawyer,
senior research manager at Ipsos (EPA:ISOS).
"It remains to be seen if this month's decline is the start of a downturn, or just a blip on the radar."