Michigan Sentiment's Shell Game: How a 3.2% Inflation Reading Masks a Consumer in Crisis

The University of Michigan’s latest consumer survey, released December 5, 2025, wants you to celebrate. Long-run inflation expectations have “softened” to 3.2%, a headline designed to soothe frayed market nerves. But this is a masterclass in misdirection, skillfully burying the real story: a consumer base fractured into a two-tier economy, with one half buoyed by asset prices and the other stuck in a sentiment crisis not seen since the peak of the 2022 inflation scare.

• The official story of “softening” inflation expectations masks the fact that the 3.2% median reading remains stubbornly above nearly all of 2024’s readings and pre-pandemic norms.

• The report completely ignores a severe divergence identified just months ago: sentiment for non-stockholders is at crisis levels, while asset owners remain insulated.

• The overall Index of Consumer Sentiment, a dismal 55.10 in September, reveals a level of broad-based pessimism that the latest inflation-focused release conveniently sidesteps.

• The report’s focus on a marginal improvement from recent peaks is a classic case of shifting the goalposts to manufacture a positive story while ignoring persistent, underlying weakness.

Shifting the Goalposts on Inflation

The December report is a study in narrative framing. It repeatedly uses words like “softened” and “eased” to describe a situation that is anything but normal. While the 3.2% median for long-run inflation expectations is indeed down from the peaks of June 2022 and April 2025, the report itself concedes this level is “above most 2024 readings as well as readings from 2020 and earlier.” This isn’t a recovery; it’s a step back from a cliff’s edge onto a very narrow, unstable ledge.

The spin continues with measures of consumer anxiety. The release claims the share of consumers expecting extreme, tail-risk inflation of 15% or higher has “fallen sharply.” In the very next sentence, it nullifies this point by admitting that on a three-month-moving-average basis, these readings are “comparable to peaks from fall 2022.”

Uncertainty, measured by the interquartile range of expectations, supposedly “eased.” Yet again, the fine print tells a different story: the current reading remains “elevated relative to 2024 and pre-pandemic” levels. In every key metric, the narrative emphasizes the direction of change from a recent crisis point, while systematically downplaying the fact that the absolute level of consumer distress remains historically high.

The Tale of Two Consumers They Forgot to Mention

To understand the deception in the December report, you have to read the chapters they left out. The September 1, 2025, release showed the overall Index of Consumer Sentiment cratering at 55.10—a number that screams deep, widespread pessimism.

The October 3, 2025, report provided the critical explanation for this weakness. It explicitly detailed a great divergence: since May 2025, sentiment had “lifted up for stock market participants” but “continued to decline” for non-stockholders. The report’s most damning line was buried within its analysis: sentiment for the non-stock-owning majority is “no better than readings at the height of post-pandemic inflation in mid-2022.”

Let that sink in. While one segment of the economy benefits from a wealth effect, the other is emotionally and financially stuck in the worst days of the inflation crisis. This isn’t a unified recovery; it’s a starkly divided economy.

This bifurcation is rooted in a profoundly unequal distribution of wealth. While the October report notes that stock ownership has nominally increased for lower-income households, it buries the fact that in Q3 2025, the top income tercile holds assets nearly 10 times the value of the bottom tercile. The December report, by focusing only on an aggregate inflation expectation number, completely papers over this chasm. It presents a single, smoothed-out data point that is statistically accurate but functionally meaningless for understanding the real economy.

The Investor Takeaway: Reading Between the Lines

The strategic shift in the University of Michigan’s reporting—from acknowledging broad weakness and its drivers in the fall to a narrow, favorably framed inflation snapshot in December—is not just an academic exercise. It has serious implications for asset allocation and risk assessment.

Market & Sector Implications:
Consumer Discretionary is a Trap:* Treating the consumer sector as a monolith is a critical error. The data points to a widening gap between high-end luxury brands catering to asset owners and discount retailers serving a squeezed consumer. The latter faces profound headwinds that aggregate data will continue to mask.
Averages are Dangerous:* The overall sentiment index is becoming a less reliable indicator of economic health. Investors must dig deeper into company earnings calls for commentary on customer segmentation. Who is buying, and who is pulling back? The answer is increasingly split along wealth lines.

Economic & Policy Outlook:
Recession Risk is Skewed:* The risk of a spending slowdown is concentrated entirely in the non-asset-owning majority. This creates a fragile economic base, where a buoyant stock market can create a false sense of security for policymakers.
The Fed's Blind Spot:* If the Federal Reserve is taking cues from headline "softening" inflation expectations without acknowledging the underlying consumer fracture, it risks making a significant policy error. The pain on Main Street is far more acute than these top-line numbers suggest.

Headlines will trumpet the "softening" inflation expectations. But the smart money understands that an average built on a foundation of extreme divergence is not a sign of stability—it's a fault line. The real story isn't in the headline number; it's in the widening chasm the report conveniently forgot to mention.