US consumer confidence drops to second-lowest on record as gas prices jump

Overview

Updated 2 hours ago

American consumers turned sharply more pessimistic in early September. The University of Michigan's Consumer Sentiment Index fell to 47.8, the second-lowest reading since 1952, down from 51.7 in August.

The trigger is energy. Diesel hit a record $6.06 a gallon, gasoline averages $4.30, and the Iran conflict that began in February keeps supply disrupted. Consumers now expect 4.6% inflation over the next year, up from 4.0%, and traders price a Federal Reserve rate hike at next week's meeting as near-certain.

The damage is entirely forward-looking. The expectations index plunged 11.1% while current conditions slipped just 1.9%, so consumers see an energy shock getting worse, not a collapse today. The five-year outlook held steady, which suggests households don't expect the damage to become permanent.

Why it matters

Elevated inflation expectations push the Fed toward hiking, squeezing households already facing record fuel prices, and risk stalling consumer spending into 2027.

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Key Indicators

47.8

Consumer Sentiment Index (September preliminary)

Second-lowest reading since the survey began in 1952, down from 51.7 in August.

4.6%

Year-ahead inflation expectations

Up from 4.0% in August, the highest since June 2026.

3.4%

Annual CPI inflation (August)

Energy costs rose more than 16% year over year in the August report.

$6.06/gal

National average diesel price

Record high, the first time above $6; up 63% from a year ago.

~86%

Market odds of September Fed rate hike

Implied by fed funds futures after the August CPI release.

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People Involved

Joanne Hsu

Director, Surveys of Consumers, University of Michigan

Published the September 2026 preliminary sentiment reading

Jerome Powell

Chair, Federal Reserve

Faces rate decision at September Federal Open Market Committee meeting; traders price ~86% chance of a hike

Organizations Involved

University of Michigan Surveys of Consumers

University research survey

Producer of the monthly Consumer Sentiment Index

The University of Michigan's monthly household survey, in continuous operation since 1946, produces the Consumer Sentiment Index.

Board of Governors of the Federal Reserve System

Central Bank

Deciding whether to raise rates at September FOMC meeting

The US central bank, whose Federal Open Market Committee sets the federal funds rate.

U.S. Bureau of Labor Statistics (BLS)

Federal statistical agency

Publishes CPI data showing 3.4% annual inflation in August

The federal agency that publishes the Consumer Price Index (CPI).

American Automobile Association (AAA)

Motorist association and data provider

Source of national fuel price data

Tracks national average fuel prices, a widely cited gauge of consumer costs.

Timeline

February 2026 September 2026

5 events Latest: Yesterday

Tap a bar to jump to that date

September 2026
Federal Reserve rate decision
Upcoming Central Bank

Federal Reserve rate decision; markets price roughly 86% chance of a hike.
In 4 days
Consumer sentiment plunges to second-lowest on record
Latest Economic Data

Consumer sentiment plunges to 47.8, second-lowest since 1952; year-ahead inflation expectations hit 4.6%.
Yesterday
August CPI shows 3.4% annual inflation
Economic Data

August CPI shows 3.4% annual inflation; gasoline up 27.4%, fuel oil up 52% from a year ago.
Yesterday
May 2026
Consumer sentiment hits record low
Economic Data

Consumer sentiment hits record low in May preliminary reading.
May 15th, 2026
February 2026
Iran conflict begins
Geopolitical

Iran conflict begins; energy supply disruptions push oil and fuel prices up.
February 1st, 2026

Scenarios

Federal Reserve hikes at September meeting

Likely Resolves by Sep 17, 2026

Discussed by: Traders pricing fed funds futures; Reuters and WSJ market coverage

After the August CPI showed 3.4% annual inflation and the Michigan survey returned record-low confidence, markets put the odds of a hike at about 86%. A hike would be the first tightening move aimed at containing rising inflation expectations. If the Fed instead holds rates, it would signal tolerance of inflation above target to avoid a growth slowdown.

Stagflation persists through year-end

Possible Resolves by Dec 15, 2026

Discussed by: RSM economists and others tracking persistent high inflation with slow growth

If energy supply stays disrupted and the Fed's response is seen as too slow or too aggressive, inflation expectations could stay entrenched near 4.6%. That combination of high prices and weak growth keeps consumer sentiment near record lows and pressures spending into 2027.

Energy shock eases, confidence recovers

Uncertain Resolves by Dec 15, 2026

Discussed by: Geopolitical analysts watching the Iran conflict; energy traders

If the Iran conflict de-escalates and oil supply recovers, fuel prices would fall, easing the biggest driver of consumer pessimism. Year-ahead inflation expectations would moderate and confidence could rebound from record lows. The five-year outlook already holding steady suggests consumers see the squeeze as temporary.

Historical Context

2 moments from history that rhyme with this story — and how they unfolded.

1973-1980

1973-1980 Oil Shocks and Stagflation

The 1973 OPEC oil embargo and the 1979 Iranian revolution sent energy prices soaring twice in one decade. Inflation hit double digits, and the Fed initially kept rates too low, letting inflation expectations become entrenched. Paul Volcker's hikes to nearly 20% in 1980-81 finally broke the spiral.

Then

The 1980-82 recession pushed unemployment above 10%.

Now

Inflation fell below 4% by 1983. The episode became the textbook case for why central banks must act before expectations de-anchor.

Why this matters now

The Fed now faces a parallel choice between hiking to contain rising expectations, as Volcker did, and waiting, at the risk of stagflation. The 1970s shows the cost of acting too late.

2021-2023

2022 Inflation Surge (2021-2023)

Post-pandemic demand collided with Russia's invasion of Ukraine, sending oil and food prices soaring. CPI peaked at 9.1% in June 2022, the highest in 40 years. The Federal Reserve responded with its most aggressive tightening since the 1980s, hiking rates from near zero to over 5%.

Then

Rate hikes cooled demand, oil prices fell, and inflation dropped to roughly 3% by mid-2023. Consumer sentiment plunged to then-record lows before recovering.

Now

The episode showed the Fed could bring inflation down without a severe recession, though the process took about two years.

Why this matters now

Today's shock is also energy-driven, with diesel at records and inflation running at 3.4%. The 2022 path suggests expectations can re-anchor if supply recovers and the Fed acts credibly.