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Consumer spending has supported the economy's recovery from the pandemic, but worries about cost increases may erode optimism.

In February, consumers anticipated inflation would worsen over the next 12 months, projecting an increase of a tenth of a percentage point to 3.1%, according to the New York Federal Reserve's survey of consumers.

It’s the latest signal that consumers are beginning to feel worse about the economy. Various measures of consumer sentiment have declined as President Donald Trump has moved to implement tariffs —which could be a problem for the economy.

“The deterioration in confidence could very well lead businesses to pare or at least delay investments and new hires, consumers to delay purchases, and for financial risk assets, such as equities, to decline or increase in volatility," wrote Nationwide Chief Economist Kathy Bostjancic.

How Could Consumer Sentiment Impede Economic Growth?

Consumer spending makes up about 70% of gross domestic product (GDP) , a measure of the economy's growth. Shoppers have helped support the economy through inflation spikes and subsequent interest rate hikes , as shoppers kept up their momentum through most of 2024 .

Data indicate some consumers were already watching their wallets before Trump implemented tariffs. If consumer surveys prove true and everyday Americans are concerned about the future of the economy, they could cut back on spending and, in turn, slow economic growth.

BMO Capital Markets Chief Economist Douglas Porter wrote that GDP in the first quarter could dip to 1% because of tariff talk. That's significantly lower than the 2.3% in the fourth quarter of last year.

“Part of the negative impact on economic activity stems from the drop in business, consumer and investor confidence, as the consensus view was that tariffs would be used as a threat and negotiating tool instead of being implemented,” Bostjancic said.

Read the original article on Investopedia