Consumer confidence in the U.S. took a bigger-than-expected hit in February as worries over rising inflation weigh on sentiment, posing fresh challenges for the Federal Reserve’s interest rate outlook.

The University of Michigan Consumer Sentiment Index dipped to 67.8 in February, according to preliminary estimates released Friday, down by 4.6 percentage points from January and missing economist forecasts of 71.1 as tracked by TradingEconomics.

The latest consumer survey shows a broad-based drop in morale, marking the second consecutive monthly decline and the first such back-to-back drop since June 2024. Both current conditions and future expectations deteriorated.

“The decrease was pervasive, with Republicans, Independents, and Democrats all posting sentiment declines from January, along with consumers across age and wealth groups,” wrote Surveys of Consumers Director Joanne Hsu.

The subindex tracking consumer expectations for the economic outlook fell to 67.3, down from 69.3, missing forecasts of a rebound to 70 and reaching its lowest level since December 2023.

Current conditions plunged from 74 to 68.7, a sharp 7.2% decline, far below the expected 73.

All five components of the index declined, with the steepest drop seen in buying conditions for durable goods, which plummeted 12%.

This was partly attributed to consumer concerns that it may already be too late to avoid the negative impact of potential tariff policies.

Inflation Concerns Take Center Stage

A major red flag emerged from inflation expectations, which surged unexpectedly.

The one-year inflation outlook jumped to 4.3%, up one full percentage point from last month and the highest reading since November 2023.

Long-term inflation expectations edged up to 3.3%, well above the pre-pandemic range, adding to concerns that inflationary pressures may persist longer than previously anticipated.

“Many consumers appear worried that high inflation will return within the next year,” the University of Michigan said in its report.

According to Hsu, the year-ahead inflation expectation gauge recorded another “unusually large” increase, after the one that had already occurred in January.

Market Reaction: Stocks Drop, Yields Surge, Gold Hits Record

The market response was swift, with stocks tumbling, Treasury yields surging and gold hitting fresh record highs as investors reassessed inflation risks and flocked to safe havens.

The S&P 500 – as tracked by the SPDR S&P 500 ETF Trust ( SPY ) – fell 0.5% by 10:20 a.m. in New York, with tech stocks underperforming, down 0.6%.

Gold prices, tracked by the SPDR Gold Trust , climbed 0.9% to $2,880 per ounce, setting a new all-time high.

Treasury yields surged, reflecting rising nervousness among bond investors. Longer-term maturities rose by as much as 7 basis points. The iShares 20+ Year Treasury Bond ETF slid 0.8%.

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