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The University of Michigan's consumer sentiment index falling sharply in February amid a jump in inflation expectations, the biggest jump that we've seen since 2021. Joining us now, we want to bring in Joanne Sue. She's University of Michigan's director of surveys of consumers. Joanne, it's great to have you here on Yahoo Finance. Talk to me about this massive uptake that we're seeing in inflation expectations and what this signals just in terms of what the months and years ahead could potentially look like.

Uh what we're seeing is a very broad-based um conclusion or opinion among consumers that inflation is going to pick up in the year ahead as well as the next five years. Um it's been it's it was a pretty large month over month increase for both short and long run expectations. Um it's not necessarily cause for panic at this moment. Um but these expectations are clearly being driven by concerns over policy, concerns that tariffs are going to lead to price hikes, um and it's very anticipatory on the basis of consumers.

How is that playing out across political orientations? We saw after the results of the election a direct flip where Democrats inflation expectations rose, Republican inflation expectations uh moved in the opposite direction indicating similar sentiment to the election results going in either party's direction. What is that sentiment telling you?

Uh partisan differences in sentiment and and in views of the economy um are long-standing. So what we saw following the the election was exactly what we expected. And that's one of the reasons why it's absolutely critical to look at independence. So independence don't really have a break around the election. Um and they're usually generally right around the national average. And critically what we saw this month was that independence had a decline in sentiment as well as Democrats. Um and they also saw the big hikes in inflation expectations. Uh so this uh the the change that we saw this month relative to January, they're not just being driven by Democrats. Um we see it critically among independence.

Joanne, is this a trend just just from who you have spoken to and and obviously comparing it back to to prior readings? Is this a trend that you expect to continue?

Uh, you know, we the the trend, if you're talking about the the fact that uh people tend to have higher levels of levels of sentiment when their party is in power in the White House, um yes, we do expect that to continue. It's been that case um at least since the Reagan administration.

Joanne, more so, more so the inflation expectations and just given the uncertainty out of Washington and kind of the whipsaw action that we've seen headline driven wise. How how is that potentially? Do you see that being factored in here as we look to the future?

Sure. Um so the last time we saw such a large uh increase in inflation expectations, long run inflation expectations um was in 2008. Um but times were very different at that time. Um inflation expectations then were really reacting to oil price shocks um that hit all-time historic highs in June. Um and then um they waned right after that. They plummeted right after that and so did inflation expectations. This time is completely different. People are not reacting to current price shocks. They're they're reacting to anticipated price shocks. Um and so it really um remains to be seen if these inflation expectations will stick. Um it really depends on what kind of tariff policies are rolled out and whether or not that um that uh that trickles down to consumer prices.

Joanne, obviously you can give us great insight into this survey, but you're also an economist in your own right. So I wonder if you can put this survey into context for us. How does something like consumer sentiment, inflation expectations, impact the real world economy, especially in the context of the last few years where inflation expectations have been rising like you said, but consumers have continued to be relentless in their spending regardless.

I think what we should know when we look at consumer spending is um that consumers have been supported by strong incomes um over the last few years. Um in spite of all the other things that are weighing down their views of the economy. Um and the other thing is that um sentiment hit an all-time low in June of 2022 and since then it was more or less on an upward trajectory and that's consistent with the strong spending that we were seeing. Um people uh were seeing that inflation was slowing. They weren't feeling great about the economy, but they were feeling better about it than they were in June. Right now we're in a situation where sentiment is starting to decline and consumer expectations over the economy are deteriorating on a number of of dimensions. Um so the upward trend that we had been seeing between 2022 and 2024, um it's not looking right now like it's necessarily going to continue, but again it's been two months of declines. Um it's it's really too soon to to to tell um if this decline is going to be persistent to the long term or not.

All right, Joanne Sue, great to get your insight. Thanks so much for joining us here today.