US consumer sentiment drops to 51.0 as inflation expectations climb higher

American consumers are feeling noticeably gloomier. The University of Michigan’s preliminary Index of Consumer Sentiment fell to 51.0 in August 2026, down from 55.2 in July, a 7.6% decline that snapped two consecutive months of improvement.

The numbers behind the malaise

The decline was broad-based, touching both how people feel about current conditions and where they think things are headed. The Index of Consumer Expectations, which captures forward-looking sentiment, dropped 8.7% to 50.6. The Current Economic Conditions index slid 5.5% to 51.8.

But the real pain showed up in business condition expectations. Short-term expectations for business conditions fell 11%, while long-term expectations cratered by 17%. Surveys Director Joanne Hsu pointed to a sharp deterioration in how consumers view the trajectory of the economy, particularly on the business side.

Inflation is the primary culprit. Year-ahead inflation expectations ticked up to 4.3% from 4.2% in July. Before the escalation of the Iran conflict in February, that same one-year measure sat at 3.4%. So consumers have ratcheted up their price expectations by nearly a full percentage point in about six months.

Long-run inflation expectations, which track where people think prices will be five years from now, held steady at 3.3%.

The income squeeze is getting worse

Perhaps the most striking data point in the entire survey: only 8% of respondents now expect their income growth to outpace inflation over the next year. In December 2024, that figure was 18%.

The pessimism isn’t evenly distributed. Older Americans, lower-income households, and less-educated consumers showed particularly steep declines in sentiment. These groups tend to spend a larger share of their income on essentials like food, energy, and housing, exactly the categories most sensitive to inflationary pressure.

Tensions from the Middle East conflict have pushed energy prices higher, which feeds directly into the cost of transportation and goods.

What this means for markets and policy

For equity markets, the most immediate implications land on retail and consumer discretionary stocks. When consumers feel squeezed, they cut back on non-essential purchases first.

The inflation expectations data also complicates the Federal Reserve’s calculus. One-year expectations at 4.3% sit well above the Fed’s 2% target. Stable long-run expectations at 3.3% give the Fed some breathing room, but if the near-term number continues climbing, policymakers may feel pressure to maintain a hawkish stance even if other economic indicators suggest a slowdown.

Investors navigating this environment will want to watch two things closely: whether the September final reading confirms or revises this preliminary print, and whether the income-versus-inflation gap continues to widen. A number where only 8% of people feel their wages are keeping up with prices is already historically unusual.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.