Consumers Hit the Wall, Turn Sour on the Future

Consumer sentiment fell in August, especially among Republicans, while inflation expectations increased, the University of Michigan said on Friday.

The preliminary estimate for August slipped nearly 8% following two months of positive results, while the expectations index decreased by 8.7%.

Coupled with a 0.6% decline in retail sales for July, the consumer mood appears to be souring just a couple months out from the November midterm elections. Polls show Republicans in danger of losing control of the House.

“While views of personal finances saw only minor declines, expected business conditions sank 11% for the short run and 17% for the long run,” Joanne Hsu, survey director, said in a statement. “Decreases in sentiment were seen across the political spectrum, with Republicans exhibiting the strongest month-to-month decline in August. Sentiment among Republicans is now 19% below readings just prior to the Iran conflict and the lowest since the 2024 election.”

Inflation expectations for the coming 12 months rose to 4.3% from 4.2% in July. That is actually higher than the current level of consumer prices, now at 3.4% annually, but Americans have grown weary of five years of rising costs for necessities like food, gasoline and electricity.

“One poor month of spending doesn’t necessarily mean the economy is falling off a cliff, but it becomes harder to dismiss alongside disappointing GDP and jobs data,” wrote Bret Kenwell, U.S. investment analyst at eToro.

Combined with an in-line inflation reading, that softer data should ease pressure on the Fed to raise rates.”

Meanwhile, the conflict with Iran seems to be no closer to a resolution, with the Islamic Republic appearing to be willing to sit out President Donald Trump.

“Although the early-month weakening in sentiment was pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree,” Hsu said, a group that has supported Trump in recent elections. “These groups are all particularly vulnerable to any erosion of purchasing power stemming from inflation. Across all consumers, only 8% expect their income growth to exceed inflation in the year ahead, down from 18% in December 2024, a reflection of the belief that high prices will continue to be burdensome.”

Inflation and high oil prices have also led to some of the highest interest rates in years, for both consumers and the government that has to pay to finance its debt. The yield on the 10-year Treasury, a benchmark for many consumer loans, is now 4.66% – up from 4.19% in January.

While the drop in retail sales could foreshadow a weakening in consumer spending as the economy heads toward the end of the year, it could lessen the chance that the Federal Reserve will raise interest rates in September. A weak jobs report for July also furthers that likelihood.

“Unexpected weakness in consumer spending isn’t good news for the wider economy, but markets may embrace the data in the near term because it strengthens the case for avoiding rate hikes,” Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, wrote Friday morning.