Inflation Expectations Surge

*      Consumer sentiment slipped to 50.8 in the preliminary May reading, the lowest since June 2022.

*    The drop was broad-based with both the expectations and current conditions indexes falling.

*      1-year and 5-year ahead inflation expectations rose again in May; 1-year inflation expectations are the highest since 1981.

*    It’s important to note that the tariff deal with China announced on Sunday was too late to impact more than a small percentage of the survey responses.

*      PNC expects the Federal Open Market Committee (FOMC) to cut the fed funds rate by a total of 100 basis points this year.

Consumer sentiment slipped to 50.8 in May according to the preliminary reading from the University of Michigan – the fifth consecutive decline. That was well below PNC’s projection for an improvement to 54.8 and the lowest reading since June 2022 (50.0). Sentiment is down by nearly 30% since January 2024 amid growing worries about tariffs, volatile equity markets and the elevated probability of recession. The decline was broad-based with the current conditions index falling 2.2 points to 57.6 and the index of consumer expectations sliding less than a point to 46.5. A slight increase in sentiment for independents was offset by a 7% drop among Republicans. Finally, while most index components were little changed, current assessments of personal finances slipped nearly 10% on weakening incomes.

In a worrisome development for the FOMC, inflation expectations surged yet again. 1-year ahead inflation expectations rose to 7.3% from 6.5% in April, the highest reading since 1981 and the fifth consecutive monthly increase. 5-year ahead inflation expectations jumped to 4.6% from 4.4% in April. The results suggest that consumers are worried that tariffs will result in significantly higher prices.

It’s important to note that the survey was conducted between April 22 and May 13, closing two days after a pause on some tariffs on imports from China was announced. The final release on May 30 will reveal the extent to which the pause caused consumer expectations to improve. Nonetheless, consumer sentiment is likely to remain depressed in the near term amid a great deal of policy uncertainty. PNC is calling for four 25 basis point cuts in the fed funds rate from the FOMC in 2025 beginning in July amid weaker job growth and rising unemployment.

PNC Bank, National Association, is a member of The PNC Financial Services Group, Inc. (NYSE: PNC). PNC is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management.