U.S. Consumer Sentiment Drops 8% as Inflation Worries Persist

U.S. consumer sentiment fell sharply in early August, reversing two months of improvement as households grew more pessimistic about the economy and remained uneasy about inflation. The University of Michigan’s preliminary Consumer Sentiment Index dropped to 51.0 from 55.2 in July, a 7.6% monthly decline and a 12.4% drop from a year earlier.

The weakness was more pronounced in expectations than in assessments of current conditions. The Index of Consumer Expectations fell 8.7% to 50.6 from 55.4, while the Current Economic Conditions Index declined 5.5% to 51.8 from 54.8. The headline reading also came in below the 54.5 level expected by economists polled by Reuters.

The University of Michigan’s preliminary August results showed that the decline was broad rather than confined to one part of the survey. Surveys of Consumers Director Joanne Hsu said views of personal finances slipped only modestly, but expectations for business conditions weakened much more, with short-run expectations down 11% and long-run expectations down 17%.

Expectations weaken more than current conditions

The deterioration in expectations is important because the Michigan survey is designed to capture how households view their own finances, the broader economy and major purchasing conditions. The university says its monthly sample is designed to represent U.S. households, excluding Alaska and Hawaii, and currently includes about 1,000 interviews. Preliminary results are released around the middle of the month, with a final reading later in the month after additional interviews are incorporated.

August’s decline also cut across demographic and political groups. Hsu said sentiment weakened across the political spectrum, with the largest month-to-month drop among Republicans. The university also reported particularly large declines among older consumers, lower-income households and people without a college degree, groups it described as especially exposed to a loss of purchasing power when prices rise.

One detail points directly to that pressure. Only 8% of consumers said they expected their income growth to exceed inflation over the next year, down from 18% in December 2024. That does not mean 92% expect their pay to fall in dollar terms, but it does show how few respondents currently expect their purchasing power to improve faster than prices.

The survey should not be read as a direct measure of consumer spending. It captures attitudes and expectations, which can change before or without a matching change in actual purchases. Still, the Expectations Index is closely watched because it asks about future personal finances and business conditions, making a broad decline useful evidence about how households are approaching the months ahead.

Inflation concerns remain elevated despite cooler July CPI

Inflation expectations moved in the wrong direction in the preliminary August survey. Consumers’ expected inflation rate over the next year edged up to 4.3% from 4.2% in July. Five-year inflation expectations held at 3.3% for a third straight month. The university noted that the one-year reading remains well above the 3.4% level recorded in February, before the Iran conflict, while the long-run reading remains above the 2.8% to 3.2% range seen during 2024.

Those expectations are not the same thing as measured inflation, but the comparison helps explain why consumers can remain uneasy even when official price data improve at the margin. The Bureau of Labor Statistics reported this week that the Consumer Price Index rose 0.1% in July and 3.4% from a year earlier, slightly below June’s 3.5% annual pace. Energy prices were still 14.7% higher than a year earlier, with gasoline up 24.6% over the same period.

That distinction matters for interpreting the survey. A household’s inflation expectation reflects what it thinks prices will do over the coming year, not simply the latest CPI reading. Persistent concern about future prices can influence decisions about discretionary purchases, borrowing and saving even if the most recent monthly inflation report looks comparatively mild.

Retail sales add a second warning on household demand

The sentiment report arrived on the same day as a weaker reading on actual retail activity. The U.S. Census Bureau reported that July retail and food-services sales fell 0.6% from June to $763.6 billion, although sales were still 5.0% above July 2025. Reuters reported that it was the first monthly decline in nine months, and that the narrower control-group measure used as an input into estimates of consumer spending fell 0.4%.

The two releases measure different things, so they should not be treated as confirmation of the same statistic. Retail sales are a nominal measure of mostly goods purchases and are not adjusted for inflation, while the Michigan survey measures household attitudes. There were also pockets of resilience inside the retail report, including a 0.5% rise in spending at food services and drinking places.

Even with those caveats, the combination gives investors and policymakers two same-day reasons to watch household demand more closely. Retail sales show that spending momentum weakened in July, while the preliminary Michigan survey suggests consumers entered August with less confidence about the economy and somewhat higher near-term inflation expectations. That is a less comfortable mix than either report would present on its own.

For the Federal Reserve, the signals point in different directions rather than to a simple policy conclusion. Softer spending and weaker confidence argue for caution about further tightening, while elevated inflation expectations are a reason not to assume that price pressures have been fully contained. Reuters reported that the weak retail data strengthened market expectations that the Fed would leave rates unchanged in September, but upcoming August price and employment data remain relevant before that meeting.

The next checkpoint for this survey comes soon. The University of Michigan says final August consumer-sentiment data are scheduled for Friday, August 28, at 10 a.m. ET. Because the current release is preliminary, later interviews can change the final readings and provide a clearer view of whether the early-August deterioration persisted through the rest of the month.