Inflation Fears Cool To Lowest Point Under Trump's Second Term As Markets Rally

American consumers are finally starting to calm down about inflation, with year-ahead expectations dropping to 3.5% in February. Meanwhile, the Dow keeps hitting new records as the stock market tries to shake off a tech-driven slump.

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Here's something you don't hear every day: Americans are actually feeling a bit better about inflation. The University of Michigan's preliminary February survey shows that year-ahead inflation expectations dropped to 3.5%, down from 4% in January. That's the lowest reading since January 2025, when President Donald Trump's second term officially kicked off.

Sure, these expectations are still higher than what we saw throughout 2024, but the decline suggests consumers might finally be starting to exhale a little when it comes to price pressures.

Long-run inflation expectations tell a slightly different story. Looking out five years, consumers now expect 3.4% inflation, up a tick from 3.3% in January. These figures remain elevated compared to the 2.8% to 3.2% range we saw in 2024, and they're definitely above the sub-2.8% readings that were normal back in 2019 and 2020, before the pandemic turned everything sideways.

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The overall Michigan consumer sentiment index rose to 57.3 in preliminary February results, beating the consensus forecast of 55. That marks three months in a row of gains and represents the highest sentiment reading since August 2025.

The Current Conditions subindex jumped to 58.3 from 55.4, crushing expectations. The Consumer Expectations subindex, however, slipped slightly to 56.6 from 57.0.

Joanne Hsu, who directs the University of Michigan Surveys of Consumers, characterized sentiment as "essentially unchanged" given the less-than-one-point increase from last month. She noted it remains "about 20% below January 2025."

Here's the really interesting part: Hsu said the recent improvement in sentiment was driven largely by consumers holding the biggest stock portfolios. For those without equity holdings, sentiment stayed "stagnant and remained at dismal levels."

Translation: if you own stocks, you're feeling pretty decent right now. If you don't, well, not so much.

Hsu pointed out that gains in current personal finances and improved durable-goods buying conditions were offset by a slight decline in expectations for long-run business conditions. She also highlighted that worries about finances and employment remain persistent, with concerns about "erosion of personal finances from high prices and an elevated risk of job loss" continuing to be widespread.

Year-ahead inflation expectations measure how much consumers think prices will rise over the next 12 months. This isn't just an academic exercise. Economists and policymakers watch this number closely because it can influence everything from wage demands to spending behavior to Federal Reserve policy decisions.

The drop to 3.5% suggests consumers are feeling less anxious about rising prices, even though expectations remain above pre-pandemic norms. Right now, markets are pricing in two Federal Reserve rate cuts before the end of the year, according to the CME FedWatch Tool.

U.S. stocks attempted a comeback Friday after three consecutive sessions of losses, as a tech-led selloff driven by software stocks finally took a breather.

The S&P 500, tracked by the Vanguard S&P 500 ETF Trust (VOO), climbed 1.26%. Meanwhile, the blue-chip index tracked by the SPDR Dow Jones Industrial Average ETF (DIA) rallied to fresh record highs.

Here's a stat worth paying attention to: The Dow Jones has now outperformed the tech-heavy Invesco QQQ Trust (QQQ) in each of the last seven sessions. That's the longest stretch of Dow dominance since 2022, suggesting investors might be rotating away from high-flying tech names and into more traditional blue-chip stocks.

Whether this rotation sticks or proves to be just another head-fake remains to be seen. But for now, the old guard is having its moment in the sun.

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