Sentiment drops as higher fuel costs hit confidence
Americans grew markedly more cautious about the economy in March as the war involving Iran continued to unsettle financial markets and lift energy prices. New survey data showed confidence weakened across demographic and political groups, with some of the sharpest declines appearing among higher income households and consumers with stock market exposure, a sign that the conflict is affecting both household budgets and broader perceptions of economic stability.
The University of Michigan said its final consumer sentiment reading for the month fell 6 percent to 53.3. That was a steeper deterioration than the earlier reading released when the conflict had only recently begun, and it came in below the 54.2 economists had expected. The latest figure is the lowest since December, underscoring how quickly confidence has eroded as the fighting has stretched on and oil prices have remained elevated.
Joanne Hsu, director of the survey, said the decline was visible across age groups and party affiliations. She also noted that middle income and higher income consumers, along with households holding stock wealth, posted especially large drops in sentiment. Those groups have been hit by the combination of rising gasoline prices and volatile financial markets, both of which intensified after the conflict began.
The deterioration in mood reflects a familiar economic pattern. When households face both higher day to day costs and greater uncertainty about the value of their investments, confidence can fall quickly even before broader economic data weakens in a meaningful way. That helps explain why the latest sentiment decline appears so broad based.
Short term inflation fears rise, but long view stays calmer
The war’s most immediate economic effect has been through energy. Global oil prices have climbed over the past month, and gasoline prices across the United States have already moved higher. That has fed into Americans’ expectations for inflation over the next year, which rose to 3.8 percent from 3.4 percent in February. The increase was the largest monthly jump in roughly a year and pushed short term inflation expectations above anything recorded during 2024.
That shift matters because consumers often react strongly to energy costs, which are highly visible and tend to influence perceptions of broader inflation. When gasoline prices rise sharply, households may begin to expect other costs to follow, even before those increases fully appear in official inflation data.
Yet the survey also offered a more reassuring signal for policymakers. Long run inflation expectations, which measure what Americans think inflation will average over the next five to 10 years, edged lower to 3.2 percent. That suggests respondents do not yet believe the current energy shock will permanently alter the inflation outlook.
Hsu said consumers may be assuming that the recent deterioration will not last far into the future. At the same time, she warned that those views could change if the war drags on or if higher energy costs begin to feed more broadly into overall prices. For the Federal Reserve, that distinction is important. Long run inflation expectations are closely watched because they offer insight into whether households still trust the central bank to keep inflation under control over time.
Weak confidence has not yet crushed spending
Despite the latest slide in sentiment, history suggests that weaker confidence does not automatically translate into a pullback in consumer spending. In recent years, Americans have often kept spending even when survey measures turned sharply negative. That was true during the inflation surge of 2022 and again in 2023 during the debt ceiling standoff, when public anxiety rose but household consumption remained relatively resilient.
One reason is that spending tends to depend more on labor market conditions than on sentiment alone. As long as people are working, receiving wage gains and not facing widespread layoffs, many continue to spend even when they feel uneasy about the economic outlook. Since mid 2023, wage growth has outpaced inflation, helping preserve purchasing power. New claims for unemployment benefits also remain historically low, even though job creation has been weak over the past year.
That means consumers still have the capacity to support the economy, at least for now. But there are signs that momentum has softened. Retail sales fell 0.2 percent in January after being flat in December. Weather likely played a role, but the data still pointed to less robust spending at the start of the year.
Extended conflict could darken the outlook
The larger concern is what happens if the conflict lasts for months rather than weeks. A prolonged war could keep energy prices high, maintain pressure on inflation and weaken markets further. If that is followed by rising layoffs or a more difficult job market, the combination could turn fragile sentiment into a more serious economic downturn.
That chain reaction is what worries economists. Falling stock prices can reduce household wealth, especially for higher income families with significant market exposure. If those losses are paired with persistent inflation and weaker hiring, spending may slow enough to pull more forcefully on growth. Since consumer spending accounts for about two thirds of the U.S. economy, even a modest retrenchment can have meaningful consequences.
Heather Long, chief economist at Navy Federal Credit Union, said that in a K shaped economy, trouble at the top can spread more quickly than many assume. The latest survey suggests that pressure may already be moving through wealthier parts of the economy first. If the war continues to drive energy inflation and market instability, the loss of confidence now showing up in sentiment data could become harder for the broader economy to shake off.
