US Consumer Confidence Sinks as War-Driven Inflation Bites

American consumer confidence deteriorated in May as households continued to grapple with elevated gas prices and persistent inflation fueled by the ongoing war with Iran, with one key gauge plunging to its lowest level in the survey’s 74-year history.

The Conference Board’s Consumer Confidence Index slipped 0.7 points to 93.1 in May — the first decline after three months of gains — while the University of Michigan’s Consumer Sentiment Index fell to a record-low 44.8, its lowest reading since the survey began in 1952, according to AP News. Two-thirds of Americans report cutting back spending in response to rising prices, and inflation-adjusted earnings have shrunk for the first time in three years.

The Iran War and Surging Energy Costs

The primary driver of the economic pain is the conflict with Iran, which began in late February 2026. The war has disrupted oil shipments through the Strait of Hormuz, a critical chokepoint for global energy supplies, sending gas prices soaring more than 50% — from approximately $2.98 per gallon pre-war to over $4.50 per gallon by May.

“American households continue to feel the brunt of surging energy costs, adding to the deluge of inflation they have weathered since the pandemic,” James McCann, a senior economist at Edward Jones, told USA Today. “Moreover, with the Strait of Hormuz still effectively shuttered, the risk that we are not past the peak of these price pressures is rising.”

Record-Breaking Pessimism

The University of Michigan’s consumer sentiment index at 44.8 is lower than any previous reading in the survey’s 74-year history, including during the 1970s oil shocks, the 2008-2009 Great Recession, the COVID-19 pandemic, and the 2022 inflation peak under the Biden administration. The index has now fallen below the previous historical trough recorded in June 2022.

Joanne Hsu, director of the University of Michigan Surveys of Consumers, said in a statement reported by Quartz that “the cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month.” She added that “consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”

Inflation Accelerates

The Consumer Price Index jumped to 3.8% in April year-over-year — the highest in three years — with gas prices rising 28.4% annually. Core inflation, which excludes volatile food and energy costs, stood at 2.8%. The Bureau of Labor Statistics reported that prices rose 0.6% from March to April, exceeding forecasters’ expectations.

Seema Shah, chief global strategist at Principal Asset Management, told USA Today that “while the pickup in headline inflation was expected, the upside surprise in core is more consequential. It tentatively hints at broadening price pressures, something the Fed will be reluctant to dismiss.”

Consumers Cut Back

The Conference Board added special questions to its May survey, finding that rising prices have caused most Americans to change their spending habits. Two-thirds of respondents said they are cutting back spending, with most reducing overall purchases and delaying expensive acquisitions. Many consumers are also planning to economize on clothes, shoes, hobby items, and toys.

Adjusted for inflation, retail sales actually declined in April after a solid increase in March, according to AP News. Average hourly earnings, adjusted for inflation, shrank in April from a year earlier — the first decline in three years.

The K-Shaped Economy

Economists describe the current environment as a “K-shaped” economy, where different segments of the population experience vastly different outcomes. The Conference Board survey showed that confidence grew among households with incomes at or above $100,000, while it fell for most others. Higher-income Americans benefit from near-record stock market highs and can absorb higher costs, while lower-income families face the full brunt of inflation with less savings buffer.

“Higher-income households are largely absorbing the increase in gas costs through larger fill-ups, while more budget-conscious consumers are responding differently by buying smaller amounts of fuel, delaying purchases, or cutting back elsewhere,” Rodney Williams, cofounder and president of SoLo Funds, told USA Today.

Political and Policy Implications

The economic downturn has created political vulnerability for Republicans heading into the midterm elections. PolitiFact rated President Trump’s claim that “consumer confidence is way up” as False, noting that all three major metrics show confidence ranging from low to near all-time lows. Independents and Republicans saw confidence fall to its lowest level since the current administration began, according to PolitiFact.

Meanwhile, the Federal Reserve faces a stagflationary dilemma — slowing growth with rising inflation — making rate decisions particularly challenging. The Fed has kept interest rates on hold so far in 2026, but some forecasters have begun pricing in a possible rate hike. Kevin Warsh, Trump’s nominee to replace Jerome Powell as Fed Chair, is awaiting Senate confirmation.

What to Watch

Long-term inflation expectations are flashing warning signs. The University of Michigan’s 5-10 year inflation expectations jumped to 3.9% in May from 3.5% in April — a seven-month high — well above the 2.8% to 3.2% range seen throughout 2024. If these expectations become entrenched, they could become self-fulfilling through wage-price spiral dynamics.

Whether consumer sentiment can recover depends largely on the trajectory of the Iran conflict. As Dana M. Peterson, chief economist at the Conference Board, noted in comments reported by Kitco News: “Consumer confidence edged downward in May as the inflationary impacts of the war in the Middle East intensified.” A resolution to the conflict could quickly reverse gas prices and restore confidence — but for now, American households are feeling the squeeze.