Consumers Are Worried About Higher Prices— And That Could Make Prices Increase

It’s starting out to be a not-so-happy new year for consumers who are now having more jitters about price increases.

Inflation expectations jumped in the latest Michigan Consumer Sentiment Index, while views on the economic outlook also worsened in the survey’s preliminary January report. Federal Reserve officials pay close attention to what consumers say about inflation because it can put upward pressure on both prices and wages.

Overall, the index fell marginally to 73.2. Economists surveyed by The Wall Street Journal and Dow Jones Newswire expected the reading to stay at December’s 74.0 level. 

Inflation Expectations Spike

The survey showed consumers now think inflation over the next year will reach 3.3%, higher than the 2.8% reading in December and the highest level since May. Consumers’ long-run expectations for inflation spiked to their highest levels since 2008.

“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 Joanne Hsu, director of the University of Michigan Surveys of Consumers.

Tariff Concerns Could Undo Inflation Progress

Economists said tariff proposals are the main driver behind the jump in inflation expectations, as nearly one-third of respondents to the Michigan survey mentioned tariffs.

President-elect Donald Trump has made tariffs a key part of his economic agenda. He proposed raising import taxes on China, Canada, Mexico, and other nations, a move that some economists think would raise prices. 

Wells Fargo economists Tim Quinlan, Shannon Grein, and Jeremiah Kohl noted that some consumers appear to be thinking that way, too. The trio wrote that people may be rushing out to buy items before tariff policies are implemented to avoid paying higher prices.

And that’s not good for inflation, especially as progress on stabilizing prices has stalled. Inflation has dropped from its 2022 peak of 9.1% annual rate to 2.7% in November but is still above the Federal Reserve’s 2% target.

“The thought here is that buying-in-advance to avoid future price increases actually creates more demand, which in turn stokes the fire of inflation,” the Wells Fargo report noted. “This ‘buy it before the price goes up’ mindset is detrimental to the gradual progress that has been achieved in bringing prices down.”