Consumer sentiment jumped in January and expectations for inflation fell, a sign that consumers are feeling more comfortable with the economy.
The University of Michigan Consumer Sentiment Index soared to 78.8 in January, well above forecast expectations of 70. That is a 21.4% change from this time last year. Sentiment is also at the highest level since July 2021, before the U.S. began grappling with too-high inflation.
Year-ahead expectations also improved. The index for consumer expectations lurched to 75.9 in January from 67.4 in December. Inflation expectations softened after falling in December and the current reading is the lowest since December 2020.
“Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended,” survey director Joanne Hsu said. “For the second straight month, all five index components rose, with a 27% surge in the short-run outlook for business conditions and a 14% gain in current personal finances.”
The reading is good news and shows that perhaps the relief from the declines in inflation is beginning to filter through to consumers, who for nearly two years have been buffeted by too-high inflation.
The Federal Reserve has been raising interest rates since March 2022 in order to drive down inflation. Inflation peaked at about 9% in June 2022 and has since fallen to a much more reasonable 3.4% (although it is still running higher than the Fed’s 2% preference).
The latest sentiment readings show just how far the Fed has come in its inflation fight.
“Sentiment has now risen nearly 60% above the all-time low measured in June of 2022 and is likely to provide some positive momentum for the economy. Sentiment is now just 7% shy of the historical average since 1978,” Hsu said.
All eyes are now on the Fed for when it will start lowering its interest rate target. At 5.25% to 5.50%, rates are as high as they are going to go, Fed officials have hinted. Fed Chairman Jerome Powell, however, has been careful not to speak in certainties.
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Despite the higher rates, the broader economy has proven surprisingly resilient and has expanded much more than most economists had expected.
Gross domestic product growth, a measure of total economic output, increased to a red-hot 4.9% seasonally adjusted annual rate in the third quarter of this year, up from a still strong 2.1% the quarter before.
