In April 2025, the University of Michigan’s five-year consumer inflation expectation rose to 4.4%, up from 4.1% previously. This increase indicates a shift in perception regarding future inflation rates among consumers.
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Shift In Consumer Sentiment
The adjustment in the University of Michigan’s five-year consumer inflation expectation from 4.1% to 4.4% signals a notable change in sentiment among households. That rise is not just a number on a chart—it reflects a deeper belief that pricing pressures are likely to linger for longer than previously assumed. For those of us engaged in trading, this sort of shift matters. What consumers believe about inflation often filters through to forward-looking pricing, yielding effects across bonds, rates, and, inevitably, derivatives.
This bump in expectations comes at a time when short- and medium-term views on inflation are already under scrutiny. If households hold the view that inflation will persist above the Federal Reserve’s long-run target, then they are more likely to adjust their behaviour—accepting higher wages, higher spending, and fewer savings—which then feeds back into the system itself. It’s a widening loop: belief fuels reality.
From our side, this nudges implied volatility assumptions that were built into certain options structures. Pricing models relying on a softening CPI might be on shaky ground for now. When you see consumers anchoring long-term inflation higher, it’s not just textbook theory—it seeps into rate markets and touches expectations of central bank tightening paths. That, in turn, influences how risk is priced across the board.
Scholars and policymakers aren’t the only ones who watch these expectations data carefully—we do too, and with reason. When surveys like Michigan’s point to stickier inflation, there’s a direct path of consequence for yield curves, swap spreads, and delta positioning on longer-dated contracts. We’re seeing moments where long gamma starts to matter far more than it did just a few weeks prior.
Impact On Financial Markets
And while headline inflation prints still dominate margins, it’s these underlying expectations—what regular people think prices will do in five years—that help ground the longer end of the curve. If those expectations start to settle above 4% for a sustained period, the market’s assumptions for terminal Fed funds rates could edge upward—perhaps not abruptly, but with enough force to need re-hedging.
It might be tempting to dismiss these shifts as temporary market noise or just survey volatility. But the move to 4.4% is the highest since mid-2011, suggesting it doesn’t sit in a vacuum. We’re keeping a close eye on what this implies for skewness indicators in equity and rate vol markets. Steepening curves may no longer be a baseline bet—mean reversion could take longer, and that changes risk profiles.
So spreads matter more now. The tightening or widening of risk premia in response to re-anchored inflation beliefs will influence what gets priced into swaps and FRAs. For those of us dissecting positioning data, this is a moment to be aware of how convexity plays out if markets start adjusting their assumption of real rates upward in slower steps.
Short-dated instruments might still react more violently to actual data releases—but for now, it may be the longer-dated volatility that needs managing. That doesn’t mean shift aggressively. It means adjusting dynamically, leaning on forward indicators like inflation swaps or breakevens. When expectations change, they ripple. We’ve seen it before, and price momentum often follows sentiment with a short lag.
No need to react hastily. Monitor, test probabilities, and revisit any assumptions of near-term normalisation being priced into the back end.
