U.S. consumer sentiment under pressure from war and rising oil prices

• U.S. consumer sentiment fell to a record low of 49.8 points in April, the weakest reading in data going back to 1978.
• Inflation expectations rose sharply, with consumers now expecting prices to increase by 4.7% over the next year.
• Oil market disruptions linked to the war with Iran and the Strait of Hormuz have pushed Brent crude near USD 106 per barrel.

U.S. consumer sentiment deteriorated sharply in April, falling to a record low. The University of Michigan Consumer Sentiment Index declined to 49.8 points from 53.3 points in March, marking the weakest reading in data going back to 1978. The decline was driven mainly by concerns over the economic consequences of the war with Iran, rising energy prices and persistent uncertainty about the geopolitical outlook.

The deterioration was visible in both consumers’ assessment of current conditions and their expectations for the months ahead. The current conditions index fell to its lowest level in four months, while the expectations index dropped to its weakest level in almost a year. Particularly concerning is the assessment of households’ future financial situation, which reached its lowest level since May of the previous year. The data suggest that U.S. consumers are increasingly feeling the impact of higher energy costs and the risk of weaker economic conditions.

Inflation expectations are rising again

The most important warning signal is the sharp increase in inflation expectations. Consumers now expect prices to rise by 4.7% over the next year, compared with 3.8% in March. Long-term inflation expectations, covering the next five to ten years, rose to 3.5%, the highest level since October. This suggests that fears of persistent price pressure are intensifying again, even though markets had previously expected inflation to gradually ease.

Fuel prices are the main source of concern. Around two-thirds of respondents expect gasoline prices to be higher in a year, with the average expected increase at nearly 50 cents per gallon. For households, this means a risk of higher everyday costs, while for the broader economy it raises the possibility of weaker consumer spending in the coming months. Although retail sales remain relatively solid, a further increase in energy prices could limit Americans’ willingness to spend.

The Strait of Hormuz is disrupting the oil market

Pressure on fuel prices is directly linked to the tense situation in the oil market. According to Goldman Sachs, oil production in Gulf countries is currently 14.5 million barrels per day lower than before the war, representing a 57% decline in regional output. The main problem remains the near-total halt in traffic through the Strait of Hormuz, one of the world’s most important oil transport routes.

The disruption of this strategic passage is significantly reducing supply and keeping tension elevated in the global energy market. Goldman Sachs analysts estimate that even a full and safe reopening of the strait, combined with no further attacks, would not lead to an immediate return of production to previous levels. Restoring output could take several months, and the longer the disruption continues, the slower the normalization process may become.

Brent crude trades near USD 105 per barrel

Brent crude prices are rising for a fifth consecutive day and are heading for a weekly gain of around 17%. On Friday, Brent was trading near USD 105 per barrel, compared with less than USD 73 before the outbreak of the war. Although Brent remains below the conflict-period peak of nearly USD 120 per barrel, current levels still represent strong cost pressure for both consumers and businesses.

Such a sharp rise in oil prices increases the risk of renewed inflation acceleration, especially if higher energy costs begin to feed through into transport, production and consumer goods prices. For U.S. households, this means greater financial uncertainty, while for the Federal Reserve it creates a more difficult policy environment. Rising inflation expectations and weaker consumer sentiment may complicate the assessment of whether the economy needs support or whether monetary policy should remain cautious.

Risks to consumer spending are increasing

The University of Michigan data show that U.S. consumers are reacting more strongly to the consequences of the conflict with Iran and rising energy prices. The temporary ceasefire between the U.S. and Iran reduces the risk of further escalation, but the lack of a lasting agreement means uncertainty remains high. As long as the situation around the Strait of Hormuz remains unstable, oil prices may stay elevated and inflation concerns may continue to weigh on household sentiment.

As a result, the U.S. economy is facing an increasingly complex challenge. On the one hand, consumption has not collapsed. On the other hand, record-low sentiment, rising inflation expectations and more expensive fuel increase the risk of weaker spending in the coming months. If energy prices remain high, pressure on household budgets could become one of the key factors limiting U.S. economic growth.