People Think Prices Are Going Up, Which Is Making Them Unhappy

Tariffs are driving inflation expectations higher among consumers and businesses, but solid labor conditions suggest consumers can still afford higher prices despite their reluctance to pay them.

One-Year Expected Inflation vs. Current Inflation

Source: Cerity Partners, University of Michigan, Conference Board, FactSet, FRED, 3/28/2025 | Click here for a larger image.

As tariffs continue to dominate the news, evidence is building that the deluge of headlines is beginning to impact the psyche of market participants. Surveys of consumer expectations from the Conference Board and University of Michigan both recorded notable jumps in near-term inflation expectations. This bucks a historical trend of consumers looking to their current inflation experience when making predictions of future inflation. People are getting the picture: tariffs mean prices will go up.

We see a similar dynamic on the business side of the economy. Survey data from the Institute of Supply Management, National Federation of Independent Business, and regional Federal Reserve surveys all point in one direction: Businesses are anticipating higher input costs (especially manufacturing companies that are reliant on imported materials for inputs), and they are hoping to pass at least some of those costs onto consumers.

And yet, the bond market isn’t acting like it sees a big inflation problem. Even as tariff threats grow in scope and scale, 10-year U.S. Treasury yields are still sitting well off their January highs, while the 5-year inflation break-even rate sits at an acceptable 2.6%. Our interpretation is that markets are viewing tariffs as both a growth problem and an inflation problem. Some prices may jump, but weak sentiment might mean that consumers are reaching the limits of their willingness to pay higher prices. Importantly, thanks to a decently solid labor market, their ability to pay higher prices remains intact. Unemployment is still low and wage growth is still strong; so for now, most people can pay higher prices, even if they don’t want to. This might have implications for pricing power of certain companies, but we don’t think it means that consumption is heading off a cliff. The current outlook for corporate profits is not congruent with an imminent wave of layoffs. Until that changes, we expect consumers to continue to grumble but eventually get back to what they do best: spend.

Past performance does not guarantee future results.

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