U.S. Consumer Sentiment in ‘Historic Slump’... Inflation Fears and Tariff Troubles Cast a Shadow

Consumer Sentiment Index Nears 'Record Low' Again

In May 2025, the University of Michigan Consumer Sentiment Index plunged to 50.8, decreasing from 52.2 in April. This figure is just 0.8 points above the all-time low record (50.0) in June 2022. The index has declined for five consecutive months since January, falling nearly 30% in that time, starkly illustrating the psychological instability of the U.S. economy (see graph above).

This sharp drop reflects more than a mere economic slowdown; it highlights structural anxieties and policy risks facing American households and markets. Notably, 75% of survey respondents voluntarily mentioned “tariffs,” up significantly from 60% in April—an indication of how negatively the Trump second term administration’s protectionist trade policies are affecting public sentiment.

Inflation Expectations Hit Highest Since 1981

Adding to the concern, perceived inflationary pressure has surged. One-year-ahead inflation expectations jumped to 7.3% from 6.5% the previous month—the highest level in 44 years. Long term (5 year) expectations also rose to 4.6%, up from 4.4%.

Interestingly, the official U.S. Consumer Price Index (CPI) for April 2025 showed a year-over-year increase of just 2.3%, indicating a slowing trend. However, consumers perceive inflation to be far more severe, with many experts attributing this to tariff-related uncertainty and trade policy instability.

Tariff Uncertainty Shakes Both Sentiment and Spending

A key driver of this sentiment collapse is President Trump’s tariff policy, particularly against China. Though the 145% tariff on Chinese imports was temporarily suspended for 90 days starting May 12, most survey responses were collected before the suspension was announced. Thus, a slight recovery in consumer sentiment may appear in next month’s data. Nevertheless, the current decline reflects public fear that tariffs will drive up import prices, subsequently raising overall living costs, disrupting supply chains, and creating shortages.

Major retailers like Walmart have already announced price increases citing tariff pressures, making inflation a more immediate concern. Some experts warn that reduced port activity could lead to significant supply shortages in the coming months.

Political Polarization Deepens Economic Anxiety

The survey also revealed stark partisan differences in consumer sentiment. Among Democrats, the index fell to a record low of 33.9. Among Republicans, it dropped to 84.2—the lowest since November. Even Trump supporters, who had previously refrained from criticizing tariff policies, now appear increasingly worried about inflation. This shift suggests that Trump's protectionism could erode his base's confidence and pose challenges for the Republican Party in the 2026 midterm elections.

Disconnect Between ‘Soft’ and ‘Hard’ Data... Real Economy Still Resilient

Interestingly, there's a disconnect between consumer sentiment and “hard” economic indicators. Official inflation is easing, the job market remains relatively strong, and retail sales continued to rise modestly in April. Oliver Allen, Chief Economist at Pantheon Macroeconomics, cautioned that the "Michigan Index may be painting an overly pessimistic picture of future consumption".

This suggests that while Americans are psychologically unsettled, they haven't yet significantly cut back on spending. However, prolonged anxiety could suppress demand for big-ticket items like cars and appliances, as households tend to postpone spending and increase savings when uncertainty grows.

Markets Rebound on Tariff Pause... But Persistence Remains Uncertain

The stock market has bounced back following the 90-day tariff truce between the U.S. and China. The S&P 500 has surged over 6% in May, recovering April’s losses. However, market experts warn that without sustained progress in trade negotiations and greater policy clarity, this rally may not last. The rebound has been led largely by the 'Magnificent 7' tech stocks, but persistent economic uncertainty could quickly trigger another correction.

S&P 500 Index Trend Over the Past Month (Source: Yahoo Finance)

Conclusion: Consumer Sentiment Won’t Recover Without Restored Policy Trust

The plunge in U.S. consumer sentiment is not just a cyclical phenomenon. A combination of Trump administration's aggressive tariff policy, political polarization, and surging inflation expectations is weakening the psychological foundation of the American economy. While headline inflation and real economic indicators remain stable for now, prolonged pessimism among consumers is likely to translate into reduced spending and economic slowdown.

Unless the government restores policy predictability, resolves trade conflicts fundamentally, and rebuilds political trust, consumer and market anxiety will not easily dissipate. The current psychological downturn is no longer a “warning light”—it has become a full-fledged “alarm bell” that policymakers and markets can no longer afford to ignore.