US consumer sentiment dropped to a record low in April as households remained focused on the inflation fallout from the war with Iran, shrugging off the ceasefire extension announced by President Donald Trump. The University of Michigan's Consumer Sentiment Index fell to a final reading of 49.8 this month, an all-time low, down from 53.3 in March, though a slight improvement on the preliminary reading of 47.6 reported earlier in the month. Economists polled by Reuters had forecast a reading of 48.0. The deterioration was broad-based, cutting across political affiliations and among consumers with stock market investments.
The Iran conflict has disrupted shipping through the Strait of Hormuz since Tehran effectively closed the waterway after the start of the war on 28 February, driving up oil prices and, in turn, the cost of gasoline and diesel. Prices for other commodities, including fertilisers, petrochemicals and aluminium, have also surged and are expected to feed through to consumers in the coming weeks. The national average retail gasoline price has hovered above $4 a gallon this month, with diesel well above $5 a gallon, according to US Energy Information Administration data. A Reuters/Ipsos poll published on Friday showed a clear majority of Americans blame Trump for the surge in fuel prices, which is weighing on his Republican Party ahead of November's congressional midterm elections.
"The Iran conflict appears to influence consumer views primarily through shocks to gasoline and potentially other prices," said Joanne Hsu, director of the Surveys of Consumers. "Military and diplomatic developments that do not lift supply constraints or lower energy prices are unlikely to buoy consumers."
Inflation expectations climb sharply
The survey's measure of consumer expectations for inflation over the next 12 months jumped to 4.7% in April from 3.8% in March, exceeding levels seen throughout 2024 and remaining well above the 2.3% to 3.0% range that prevailed in the two years before the Covid-19 pandemic. Five-year inflation expectations rose to 3.5% from 3.2%.
The figures add to a survey from S&P Global published on Thursday showing that a measure of prices charged by businesses for goods and services jumped in April to its highest level in nearly four years, reinforcing market expectations that the Federal Reserve will not cut interest rates this year.
Economists said that while the correlation between consumer sentiment and spending is weak, lower-income groups in particular are likely to scale back consumption. "We expect the hit to real disposable income growth from higher gas prices will slow consumption growth," said Grace Zwemmer, a US economist at Oxford Economics. "The impact will be mostly felt by low- and middle-income households, since a larger share of their overall spending goes toward gasoline." Expensive diesel is also expected to raise the cost of goods transported by road.
"More pain will come as higher transportation costs are passed along for food, appliances, toys and every other item that travels on a ship, car or plane," said Heather Long, chief economist at Navy Federal Credit Union. "Sentiment won't improve until the Strait of Hormuz is open and there is a permanent end to the conflict."
Source: Reuters