Current University of Michigan Consumer Sentiment Index and Fed Policy/Actions

[Onda]

The University of Michigan sentiment index matters to the Fed less as a growth measure than as a signal about inflation psychology. When sentiment collapses and the survey’s inflation expectations rise, as they did in the latest preliminary April reading, it suggests households may start assuming higher prices will persist, which can make inflation harder for the Fed to bring back down.

47.6 reading is the lowest in the survey's 70-plus-year history.

Period	University of Michigan Sentiment	1-year inflation expectation	Context
1980 Volcker inflation era	~51	~10–12%	Very high inflation, aggressive rate hikes
2008 financial crisis	~55	~5%	Banking panic, recession fear
2020 COVID shock	~71	~3%	Shutdown shock but inflation low
2022 inflation spike	~50	~5.4%	Post-pandemic inflation surge
April 2026 now	47.6	4.8%	Energy shock + persistent affordability stress

 

[racy]

"Energy shock" is one way to put it, I guess.

 

[FI_RElater]

I'm expecting a raise in rates, due to inflation picking up, in Q4 '26 or Q1 '27 and therefore not going with bond funds at this time (it suggests a mild '22 event with both stocks and bonds taking a hit).

I'm looking for CD's with reasonable (plus) returns.... 4.5+% if available. I worry that there is "incentive" for the current Sec of Treas to "misprice" inflation and cause TIPs to underrepresent the "true rate" that should be given, thus preferring nominals.

 

[ncbill]

1970s-style oil shock.

The question now: will it be more like the 1973 oil shock or the milder 1980 one?

 

[FD1000]

Economic forecasts are often wrong, which is why I don’t rely on them.

When stock or bond analysts are asked about the markets, many fall back on repeating broad economic narratives. To me, that’s often a sign they don’t have a clear view of what’s actually driving markets and are just filling space.

 

[audreyh1]

The Fed rarely raises rates when energy prices jump because the higher energy cost itself tends to slow the economy.

 

[Montecfo]

The same survey shows that 1 year and 5 year forward inflation expectations have dropped sharply since April 2025.

Inflation expectations 1 year out:

April 2025 6.5%
April 2026 4.8%
Actual inflation per BLS March 2026 3.3%

Inflation expectations 5 years out:

April 2025 4.4%
April 2026 3.4%

 

[Midpack]

It seems we're more polarized and cynical now than past generations. Politics seems to factor into our "sentiments" more than at any earlier time in my life. If true, I wonder how much of a factor that would be? IOW the baseline is probably trended down no matter what. But I don't care enough to research it.

 

[Onda]

It seems we're more polarized and cynical now than past generations. Politics seems to factor into our "sentiments" more than at any earlier time in my life. If true, I wonder how much of a factor that would be? IOW the baseline is probably trended down no matter what. But I don't care enough to research it.

Michigan says national sentiment continues to align closely with independents.

 

[marko]

The higher rates of the last few years has been quite helpful to parts of my income stream.

All of a sudden, my MM holding account went from paying negligible amounts to 5%.

 

[MichaelB]

The University of Michigan sentiment index matters to the Fed less as a growth measure than as a signal about inflation psychology. When sentiment collapses and the survey’s inflation expectations rise, as they did in the latest preliminary April reading, it suggests households may start assuming higher prices will persist, which can make inflation harder for the Fed to bring back down.

47.6 reading is the lowest in the survey's 70-plus-year history.

Period	University of Michigan Sentiment	1-year inflation expectation	Context
1980 Volcker inflation era	~51	~10–12%	Very high inflation, aggressive rate hikes
2008 financial crisis	~55	~5%	Banking panic, recession fear
2020 COVID shock	~71	~3%	Shutdown shock but inflation low
2022 inflation spike	~50	~5.4%	Post-pandemic inflation surge
April 2026 now	47.6	4.8%	Energy shock + persistent affordability stress

The UM index is something to consider. At the same time, though, consumer spending is at an all time high and rose 0.5% in February. This looks like a case where expressed and revealed preferences point in opposite directions.

 

[Montecfo]

The University of Michigan sentiment index matters to the Fed less as a growth measure than as a signal about inflation psychology. When sentiment collapses and the survey’s inflation expectations rise, as they did in the latest preliminary April reading, it suggests households may start assuming higher prices will persist, which can make inflation harder for the Fed to bring back down.

47.6 reading is the lowest in the survey's 70-plus-year history.

Period	University of Michigan Sentiment	1-year inflation expectation	Context
1980 Volcker inflation era	~51	~10–12%	Very high inflation, aggressive rate hikes
2008 financial crisis	~55	~5%	Banking panic, recession fear
2020 COVID shock	~71	~3%	Shutdown shock but inflation low
2022 inflation spike	~50	~5.4%	Post-pandemic inflation surge
April 2026 now	47.6	4.8%	Energy shock + persistent affordability stress

It is interesting. The sentiment readings seem out of sync with events. Today's economic conditions produce reduced sentiment compared to the covid era, really?

And worse than the 2008 financial crisis aka Great Recession ??

This survey appears to be broken.The change in methodology since mid 2024 seems to have brought greater pessimism. That is possibly also a factor. Or current survey respondents are just less resilient than in decades past.

Other sentiment indicators are not registering all-time lows. Example: the Conference Board's Consumer Confidence Index is at 91.8, well above its historic low of 30 registered during the Great Recession.

 

[Onda]

It is interesting. The sentiment readings seem out of sync with events. Today's economic conditions produce reduced sentiment compared to the covid era, really?

And worse than the 2008 financial crisis aka Great Recession ??

This survey appears to be broken.The change in methodology since mid 2024 seems to have brought greater pessimism. That is possibly also a factor. Or current survey respondents are just less resilient than in decades past.

Other sentiment indicators are not registering all-time lows. Example: the Conference Board's Consumer Confidence Index is at 91.8, well above its historic low of 30 registered during the Great Recession.

You are trying very hard to explain away why the numbers started falling in March 2025.

The methodology change happened in spring/summer 2024: Michigan moved from a cellphone telephone survey to an address-based web survey, with the transition ending in July 2024.

Here are numbers:

Month	Sentiment	1-Year Inflation Expected
Jan 2024	79.0	2.9%
Feb 2024	76.9	3.0%
Mar 2024	79.4	2.9%
Apr 2024	77.2	3.2%
May 2024	69.1	3.3%
Jun 2024	68.2	3.0%
Jul 2024	66.4	2.9%
Aug 2024	67.9	2.8%
Sep 2024	70.1	2.7%
Oct 2024	70.5	2.9%
Nov 2024	71.8	2.6%
Dec 2024	74.0	2.8%
Jan 2025	71.7	3.3%
Feb 2025	64.7	4.3%
Mar 2025	57.0	5.0%
Apr 2025	52.2	6.7%
May 2025	52.2	6.6%
Jun 2025	60.7	5.0%
Jul 2025	61.8	4.5%
Aug 2025	63.7	4.6%
Sep 2025	70.5	4.7%
Oct 2025	64.9	4.6%
Nov 2025	51.0	4.5%
Dec 2025	52.9	4.2%
Jan 2026	56.4	4.0%
Feb 2026	56.6	3.4%
Mar 2026	55.5	3.8%
Apr 2026 (prelim.)	47.6	4.8%

 

[Qs Laptop]

The University of Michigan sentiment index matters to the Fed less as a growth measure than as a signal about inflation psychology. When sentiment collapses and the survey’s inflation expectations rise, as they did in the latest preliminary April reading, it suggests households may start assuming higher prices will persist, which can make inflation harder for the Fed to bring back down.

The Federal Reserve will have a harder time lowering inflation if the public's perception assumes higher prices will persist?

Is this a legitimate economic theory?

 

[Montecfo]

It is interesting. The sentiment readings seem out of sync with events. Today's economic conditions produce reduced sentiment compared to the covid era, really?

And worse than the 2008 financial crisis aka Great Recession ??

This survey appears to be broken.The change in methodology since mid 2024 seems to have brought greater pessimism. That is possibly also a factor. Or current survey respondents are just less resilient than in decades past.

Other sentiment indicators are not registering all-time lows. Example: the Conference Board's Consumer Confidence Index is at 91.8, well above its historic low of 30 registered during the Great Recession.

You are trying very hard to explain away why the numbers started falling in March 2025.

?
I made a very different point in fact as is clear from the post you are responding to. Namely, why does this survey produce responses so out of sync with other sentiment indicators and their real economic data?

The methodology change happened in spring/summer 2024: Michigan moved from a cellphone telephone survey to an address-based web survey, with the transition ending in July 2024.

I am not a data scientist, but folks that analyze data for a living suggest that the UM Sentiment survey's methodology has introduced bias due to small sample size and failure to control for the demographics of its sample when it switched survey methodology. I won't bother to provide quotes from this rather lengthy piece as I know you will be reading it in detail but let's just say it undermines completely the point you seem to have been trying to make by crowing about this survey in multiple threads.

Oh, and their analysis was done in October of 2024, well before the period you are apparently wishing to highlight.

The effect of online interviews on the University of Michigan Survey of Consumer Sentiment

Negativity among online respondents is dragging sentiment down by nearly 9 index points

www.briefingbook.info

Other commentators have echoed this conclusion.

 

[Onda]

Oh, and their analysis was done in October of 2024, well before the period you are apparently wishing to highlight.

The effect of online interviews on the University of Michigan Survey of Consumer Sentiment

Negativity among online respondents is dragging sentiment down by nearly 9 index points

www.briefingbook.info

Exactly! So the massive drop starting in March 2025 has nothing to do with it.

If you examine the trend in consumer confidence, you will see the same pattern . So all those reports are wrong, right?

Don't blame the messenger. I am simply stating facts and you can interpret them any way you like.

 

[Koolau]

1970s-style oil shock.

The question now: will it be more like the 1973 oil shock or the milder 1980 one?

(As I mentioned for Stagflation): I lived through the oil-shocks of the '70s and this is NOT that. Those oil shocks were imposed upon the world by a cartel which had a strangle-hold on oil. In this case, we (the USA) have done the "imposing" - based on going to war with a major producer and part-time "keeper" of the oil routes. We (USA) have very significant control over how the oil "shock" proceeds. We can't end it over night, but we can end it when the time is right.

BIG difference between then and now: (At least within the USA) there is no shortage of oil. World wide, there is a shortage which has raised prices for the world (oil is a world market commodity). BUT within the USA we produce virtually all the oil we need. No long lines at gas pumps, no alternate days for gas, no odd/even license numbers to buy gas, no 55 mph speed limit.

I hate high gas prices but most of us (in USA) can afford them. We can't deal with actual shortages at the gas pumps - and there is no USA shortage.

Very different (okay, arguably).

 

[Koolau]

It seems we're more polarized and cynical now than past generations. Politics seems to factor into our "sentiments" more than at any earlier time in my life. If true, I wonder how much of a factor that would be? IOW the baseline is probably trended down no matter what. But I don't care enough to research it.

I think this is very true.

Those forcing down the consumer sentiment (arguably) don't understand the current situation and allow their (unrelated) negative political feelings to affect their sentiments.

We're in an unpleasant situation but we're not in a crisis (not a real one, anyway). (Again, arguably).

 

[OK EE]

I think this is very true.

Those forcing down the consumer sentiment (arguably) don't understand the current situation and allow their (unrelated) negative political feelings to affect their sentiments.

We're in an unpleasant situation but we're not in a crisis (not a real one, anyway). (Again, arguably).

I'm going to go so far as to say that if you're investing based on politics you're going to do (much) worse than someone with a basic index fund portfolio that they contribute to regularly regardless of political winds.

My liquid assets are up 4% YTD as of last week. Slow and steady wins the race.

 

[Onda]

I'm going to go so far as to say that if you're investing based on politics you're going to do (much) worse than someone with a basic index fund portfolio that they contribute to regularly regardless of political winds.

My liquid assets are up 4% YTD as of last week. Slow and steady wins the race.

That is fair, but it is also hard to ignore that we live in an era where many of the wealthiest Americans, especially in the upper income brackets, lean Democratic, and the richest districts in the country are usually blue.

If market success were really driven by political instinct alone, that pattern would deserve a closer look.

 

[marko]

That is fair, but it is also hard to ignore that we live in an era where many of the wealthiest Americans, especially in the upper income brackets, lean Democratic, and the richest districts in the country are usually blue.

If market success were really driven by political instinct alone, that pattern would deserve a closer look.

Right. A close friend leans quite heavily and vocally in one direction. I was surprised shocked that much of his portfolio violated his very strong beliefs.

He said "Well, there's beliefs and then there's making money"

 

[Onda]

Right. A close friend leans quite heavily and vocally in one direction. I was surprised shocked that much of his portfolio violated his very strong beliefs.

He said "Well, there's beliefs and then there's making money"

We are living in an increasingly sharp formed K-shaped economy, where asset ownership matters far more than stated ideology. In that environment, owning U.S. stocks is often less about beliefs and more about recognizing where wealth creation has concentrated — and many policies, including BBB, ended up being highly favorable to people already in the upper 10%.

I think the negativity reflected in the University of Michigan Consumer Sentiment Index is concentrated much more in the bottom 80%.

 

[Koolau]

Right. A close friend leans quite heavily and vocally in one direction. I was surprised shocked that much of his portfolio violated his very strong beliefs.

He said "Well, there's beliefs and then there's making money"

 

[RobLJ]

On the issues of the K-shaped economy, consumption by income level, and consumer sentiment, my brother in law (the econometrician) over Christmas sent me the following report from the Dallas Fed. It might be of some interest.

Consumption concentration may be up, adding slightly to economic fragility

Analysts have taken notice of the large share of total U.S. spending attributable to the very highest earners. The concerns are that the emergence of K-shaped growth—bifurcated activity at an elevated rate among high earners and much more restrained among most others—may put the U.S. in greater...

www.dallasfed.org

 

[Onda]

On the issues of the K-shaped economy, consumption by income level, and consumer sentiment, my brother in law (the econometrician) over Christmas sent me the following report from the Dallas Fed. It might be of some interest.

Consumption concentration may be up, adding slightly to economic fragility

Analysts have taken notice of the large share of total U.S. spending attributable to the very highest earners. The concerns are that the emergence of K-shaped growth—bifurcated activity at an elevated rate among high earners and much more restrained among most others—may put the U.S. in greater...

www.dallasfed.org

This is very telling conclusion:

"Compared with an economy with low consumption concentration, the current economy with high consumption concentration is more vulnerable to downside risks in return on assets and less vulnerable to a temporary slowdown in the labor market. Quantitatively, the effects are small. Consumption concentration may be up but has resulted in little heightened economic fragility."