Key Points:
- The University of Michigan’s consumer sentiment index plunged to an all-time low of 44.8 in May.
- Goldman Sachs noted that short-term inflation expectations rose to 4.8%, the highest in nine months.
- A massive 57% of consumers reported that high prices are actively eroding their household finances.
- Shorter-dated U.S. Treasury yields rose sharply as bond markets reacted to the dismal consumer data.
US consumer sentiment crashed to an all-time low in May, driven by relentless cost-of-living anxieties and skyrocketing gasoline prices. The University of Michigan’s final May report, analyzed closely by Goldman Sachs, revised the benchmark index down to 44.8. This surprising drop brought consumer confidence below the previous record low set in June 2022, highlighting deep financial pain across the country.
The final reading of 44.8 represented a sharp 3.4-point drop from the preliminary estimate of 48.2 released earlier in the month. Both main components of the index hit historic lows. The current economic conditions index dropped to 45.8. In contrast, the consumer expectations index plummeted to 44.1, indicating that Americans hold deeply pessimistic views about both their current finances and the country’s economic future.
Rising inflation expectations fuel this intense consumer pessimism. The final May report revised the median inflation expectation for the next year up by 0.3 percentage points to 4.8%. This marks the highest short-term inflation expectation since August 2025. Long-term inflation expectations over the next five to ten years also jumped by 0.5 percentage points to 3.9%, indicating that consumers expect high prices to persist for a very long time.
The rapid erosion of consumer confidence links directly to the pain Americans feel at the gas pump. The ongoing military conflict in the Middle East has closed the Strait of Hormuz, cutting off a fifth of the world’s oil supply. This massive shipping disruption has driven global oil prices high and caused retail gasoline prices to soar. Consumers increasingly worry that these high energy costs will soon spread beyond fuel, driving up the prices of food, rent, and other daily essentials.
Everyday price pressures are taking a massive toll on household bank accounts. A staggering 57% of surveyed consumers spontaneously mentioned that high prices were eroding their personal finances. This represents a significant jump from the 50% who complained about price erosion last month. Lower-income consumers and those without college degrees reported the steepest drops in confidence, as these vulnerable groups must spend a much higher share of their income on gas and basic groceries.
The economic pain is also reshaping the political landscape ahead of the upcoming elections. Independents and Republicans saw their sentiment drop to the lowest levels of the current presidential administration. In contrast, Democrats’ sentiment remained relatively flat, highlighting a deep partisan divide in how Americans perceive the economy’s health based on their political alignment.
Financial markets reacted immediately to the dismal consumer report. Short-term United States Treasury yields climbed on Friday afternoon as investors digested the record-low sentiment. The yield on the two-year Treasury note rose 4.8 basis points to reach 4.127%. The five-year Treasury yield climbed to 4.268%, while the ten-year Treasury note yield edged up slightly to 4.573%, hovering near multi-year highs.
While the bond market panicked, the stock market showed a strange and striking defiance. Major stock indexes actually rose on Friday, ignoring the terrible consumer data and the threat of sticky inflation. The S&P 500 rose 0.55% to trade near 7,486.32, putting it on track for its eighth consecutive weekly gain. Tech-heavy indexes also pushed higher, driven by massive investor enthusiasm for artificial intelligence and strong corporate earnings.
Analysts at Goldman Sachs point out that this massive disconnect represents a highly bifurcated economy. Wealthy, invested consumers are enjoying the wealth effect of record-high stock prices and face very little variable-rate debt. Meanwhile, working-class wage earners, who do not own stocks, carry the full burden of inflation. They are the ones telling the University of Michigan that their personal finances feel worse than they have in decades.
The historic plunge in consumer confidence poses a massive challenge for policymakers at the Federal Reserve. Central bankers want to bring inflation down to their 2% target, but high energy costs and rising consumer expectations make their job incredibly difficult. Until the Middle East conflict ends and energy prices fall, everyday consumers will likely remain deeply pessimistic, keeping the threat of a prolonged stagflation lock active.
