Economy 5 min read By Arthur Ellington
US consumer sentiment weakens as inflation expectations climb
American households turned more pessimistic in September, with inflation expectations rising and sentiment deteriorating, complicating the Federal Reserve's policy outlook.
US consumer sentiment deteriorated in September as inflation expectations rose, according to fresh survey data that underscores the pressure on household budgets and the challenge facing policymakers. The decline in sentiment suggests Americans are growing more anxious about the economic outlook, even as broader indicators of activity remain relatively resilient.
The survey showed that consumers expect prices to rise more quickly over the coming months, a shift that could influence spending decisions and complicate the Federal Reserve's efforts to bring inflation back to its 2% target. Rising inflation expectations are closely watched by central bankers because they can become self-fulfilling if workers demand higher wages and businesses raise prices in anticipation of future cost increases.
The deterioration in sentiment comes amid a broader debate over the direction of US economic policy. Treasury Secretary Scott Bessent has faced criticism from bond investors and former Wall Street colleagues over the administration's fiscal approach, including tariffs and a recent intervention to support the yen. Speaking at a Republican Party midterm convention, Bessent dismissed the criticism, saying: «If some of the Bloomberg Terminal bros are unhappy with what I'm doing, well, that's too bad.»
Bessent pointed to the performance of the Treasury market, arguing that bond yields have become increasingly correlated with energy prices. «We have a supply shock, and we will get to the other side of this,» he said, adding that recent Treasury auctions had been strong and that the market was in «very good shape.»
However, the Treasury's recent buyback programme, intended to bring down long-dated bond yields after they hit two-decade highs, has had limited effect. Inflation expectations have been pushed higher by supply shocks, including the situation in Iran and tariffs, and yields on 10- and 30-year Treasuries are now higher than before the intervention. At the time of writing, 30-year Treasuries had reached a 52-week high of 5.35%, while 10-year yields stood at 4.94%.
The rise in yields reflects investor concerns about inflation and the government's $2 trillion budget deficit. Higher yields increase borrowing costs for the Treasury at a time when it is already issuing large amounts of debt. The dynamic has drawn criticism from prominent investors, including Stan Druckenmiller, who argued in a Wall Street Journal op-ed that the US should not put itself on the wrong side of the bond market. «Let the bond market speak,» he wrote.
Bessent, however, defended his approach, suggesting that term premiums for longer-dated bonds are not significantly elevated compared with shorter-term assets. «That is telling you that investors are not demanding a premium for longer-term U.S. debt, so I'm not sure where the beef is,» he said. He also dismissed the criticism as «a bunch of noise,» adding: «In my career I've made money ignoring the noise.»
Analysts at UBS noted that bond markets are focused on the inflation issue, particularly the rapid rise in crude oil prices. «The hope that the political cost of higher fuel prices would encourage the U.S. administration to seek reconciliation with Iran seems to have faded from markets,» wrote Paul Donovan of UBS. He added that Bessent's bond buyback plan «has had no discernible impact.»
The combination of weakening consumer sentiment and rising inflation expectations presents a difficult backdrop for the Federal Reserve, which must weigh the risk of persistent inflation against signs of slowing demand. Consumers' inflation expectations are a key input into the Fed's policy decisions, and a sustained increase could keep interest rates higher for longer.
For British businesses and investors, the developments in the US matter because they influence global borrowing costs, currency markets, and trade flows. A more pessimistic American consumer could also weigh on global growth, particularly if spending slows in the world's largest economy. The coming weeks will bring further data on consumer prices and retail sales, which will help clarify whether the September deterioration in sentiment is a temporary blip or the start of a more sustained downturn.
