Sentiment dropped unexpectedly, in part reflecting a big rise in one-year inflation expectations. The February index fell to 67.8 in the first February reading from 71.1 in January, far below the expected 72.0.

Especially unfortunate: one-year inflation expectations surged to 4.3 percent in February, highest since November 2023, from 3.3 percent in January. We have seen two consecutive months of unusually large increases. This is only the fifth time in 14 years there has been a one-month rise of one percentage point or more in year-ahead inflation expectations.

Consumers appear to be fretting about the impact of import tariffs, as they fear it is too late to avoid price increases on imported durable goods, and they see inflation hurting their personal finances generally, the University of Michigan said.

The consensus looks for an uptick to 72.0 in February from 71.1 in January.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.