In April 2025, the University of Michigan’s preliminary consumer sentiment index stood at 50.8, lower than the expected 54.5 and down from 57.9 previously. Current conditions measured at 56.5 fell short of the anticipated 61.5, while expectations dropped to 47.2, the lowest since the pandemic’s nadir.
Inflation expectations for the next year rose to 6.7%, up from 4.9% prior, and five-year inflation expectations increased to 4.4%, the highest since 1991. The survey revealed a uniform decline in sentiment across various demographics, with interviews conducted between March 25 and April 8.
Consumer Sentiment Decline
What this tells us, quite plainly, is that confidence among consumers is waning faster than markets assumed, and it’s happening across all groups. The drop in the sentiment index, particularly in expectations, means households are bracing for tougher conditions ahead. When everyday people expect things to worsen economically, they’re less likely to spend on non-essentials, more likely to pull back, and that affects company revenues across the board. That’s not theoretical—it feeds directly into projected earnings, risk premiums, and discount rates.
Inflation expectations shifting as sharply as they did—jumping 1.8 percentage points in the one-year view—signal more than just concern over prices. What we’re seeing is the potential unanchoring of inflation outlooks, which challenges the idea that inflation is steadily cooling. That idea had already been wearing thin over the last few months, but the bounce to multidecade highs in long-term expectations throws another spanner in the works.
Changes like this matter to us specifically because they hint at how pricing models may need to adjust. We’re not just dealing with volatility implied by headlines; it’s being written into the data now. And with five-year expectations now topping levels we haven’t seen since the early ’90s, that’s not noise—it’s a shift in perception. It implies tighter-for-longer monetary conditions might not be fully priced in yet, despite how much forward guidance is lying out in the open.
Market Adjustment Strategies
Williams’ recent remarks on inflation persistence will likely take on fresh weight. Short-dated vols may have more room to run, and pricing in steeper tails isn’t academic; it’s protective now. Some of the defensive posture in the front-end is earning its keep. Directional plays should stress not just yield curve topside risk, but also changes in breakeven structures.
Expectations-based instruments—swaps and breakevens in particular—could reprice sharply if more market participants start believing the consumer view is more accurate than official projections. And unless we see near-term data outright contradicting Michigan’s findings, it’s hard to justify modelling soft inflation pushback into summer.
We find that positioning strategies benefitting from greater price drift and reduced support at short-tenor risk points will likely benefit the most. Surprises are no longer surprising, and cabinets filled with ‘price stability’ language are now sounding more defensive than reassuring. That shifts how we measure exposure—more dispersion, not just directionality, should guide option structure in this environment.
