In addition to the overall index falling for the third straight month to a fresh record low—even undercutting the levels seen during the 1970s oil crisis—inflation expectations rose as the Iran war and the continued closure of the Strait of Hormuz keep energy prices high.

Consumers’ year-ahead views inched up to 4.8% this month from 4.7% last month, further exceeding the 3.4% reading seen in February just before the war started. But more troubling was that long-run inflation expectations jumped to 3.9% in May from 3.5% in April, well above 2024’s range of 2.8% to 3.2%.

The near- and long-term expectations are back at rates seen late last year, when consumers were still reeling from President Donald Trump’s tariffs. But unlike his trade war, he can’t unilaterally decide to end the Iran war and bring oil prices back down.

And while consumer surveys are notorious for being sharply divided along political lines, the surge in extended views was driven by independents and Republicans, meaning Trump’s own supporters doubt he can lower inflation soon.

In fact, Republicans’ long-term inflation expectations are now more than double what they were in February 2025, right after he returned to the White House.

“Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run,” Surveys of Consumers Director Joanne Hsu said in the University of Michigan report.

Such a shift in views can perpetuate more inflation, especially if workers demand higher pay increases to offset expectations of more price hikes.

From a central banker’s point of view, this raises fears of a nightmare scenario where persistently higher inflation causes consumers to lose faith that it will eventually cool off.

The Fed has regularly pointed to long-term inflation views being well anchored when previously arguing that rate hikes were not needed. But the outlook is shifting.

Hours before the latest University of Michigan survey dropped, this is precisely what Fed Governor Chris Waller warned about during a speech he gave in Germany.

After pushing for more aggressive rate cuts last year as jobs data weakened, he has dramatically changed his focus, saying he is now more concerned about inflation than the labor market, which has shown signs of stabilizing.

And while the Fed typically “looks through” price shocks by not responding immediately to short-term spikes, Waller explained that a series of shocks can change consumer psychology.

“If people do not know the true inflation generating process and see a sequence of positive price shocks, they may infer that the next price shock is more likely to be positive than negative,” he said. “This view can lead them to raise their inflation expectations even though they may also believe the recent shocks are transitory.”

Today, consumers are grappling with the shock of higher oil prices after seeing prices rise last year due to Trump’s tariffs.

To be sure, the administration pulled back from its most punitive rates, and the Supreme Court struck down its global levies. But Trump has already started lining up a new set of duties to replace the ones that were deemed unconstitutional.

Waller pointed out that the Fed came within a quarter percentage point of its 2% inflation goal last April, right before Trump imposed his tariffs.

Still, the Fed has also failed to achieve its inflation target since the pandemic, and that fact consumers have faced higher prices for several years also contributes to a perception that the previous era of low inflation is over.

“If I believe inflation expectations start to become unanchored, I would not hesitate to support an increase in the target range for the federal funds rate,” Waller vowed. “But at this point that action is premature. It is time to simply sit and watch how the conflict and the data evolve.”