Consumer Sentiment Jumps as Near-Term Inflation Expectations Sink

U.S. consumer sentiment got a bigger-than-expected boost as the new year kicked off.

The University of Michigan’s consumer sentiment index rose to a score of 64.6 in January, topping expectations for a 60.5 reading and last month’s 59.7. This was the third straight gain for the index and the first reading above 60 since April of 2022.

Despite the better-than-expected reading, sentiment remains depressed by historical standards. The January figure is 3.9 percent below the year-ago reading. The average in the 21st century is 84.2.

The index that tracks sentiment around current economic conditions jumped to 68.6 from 59.4, a 15.5 percent improvement. That is the best reading since April of last year but still below January of 2022’s level.

The barometer of consumer expectations for the economy rose to 62 from 59.9. This is also the highest reading since last April but below the level recorded at the start of last year.

“Consumer sentiment remained low from a historical perspective but continued lifting for the second consecutive month,” said Joanne Hsu, the director of the survey.

Sentiment was boosted by a surge in current assessments of personal finance thanks to higher incomes and easing inflation. Department of Labor data shows that average hourly earnings rose 0.3 percent while the Consumer Price Index declined by 0.1 percent. Real average  hourly earnings rose month-t0-month in both December and November. Compared with a year ago, however, wages still lag behind inflation for a real decline for 1.8 percent.

Expectations for inflation one year from now fell for the fourth month in a row, dropping to 4 percent from December’s 4.4 percent. This is the lowest reading since April of 2021 but significantly above the 2.3 percent to three percent range in the two years prior to the pandemic.  Expectations for inflation over the next five years ticked up to three percent from 2.9 percent, remaining in the narrow 2.9 percent to 3.1 percent range for 17 of the last 18 months. Long-run expectations ranged from 2.2 percent to 2.6 percent in the two years prior to the pandemic.