Consumer Sentiment Beats as Inflation Fears Ease

Americans are feeling slightly better about the economy.

The University of Michigan's final January consumer sentiment index came in at 56.4, up from December's 52.9 and well above both the preliminary 54.0 reading and the 54.0 consensus forecast. It marks the highest level since August and the second consecutive monthly improvement.

More importantly, inflation expectations are cooling. Year-ahead inflation expectations dropped to 4.0%—the lowest reading since January 2025.

Broad-Based Gains

The improvement wasn't concentrated in any single demographic.

Sentiment rose across income levels, education attainment, age groups, and political affiliations. That's unusual. Consumer confidence often splits along partisan lines or tracks closely with stock market performance, which benefits wealthier households disproportionately.

This time, the gains were widespread. Even if modest in absolute terms—3.5 index points isn't a massive move—the breadth suggests something more fundamental than portfolio effects.

The Current Economic Conditions Index rose for the first time in six months to 52.4. The Consumer Expectations Index climbed for a third straight month to 55.0. Both components contributed to the headline beat.

Inflation Expectations Matter

The Fed watches these surveys closely.

Year-ahead inflation expectations falling to 4.0% from December's 4.2% provides cover for the central bank's current pause. If consumers expect inflation to moderate, they're less likely to accelerate purchases—which would itself fuel inflation.

The reading validates what recent CPI data suggested: the worst of the inflation surge has passed, even if prices remain elevated relative to pre-pandemic levels.

Long-run inflation expectations ticked up slightly to 3.3% from 3.2%—still above the Fed's 2% target but not alarming. Markets remain priced for the Fed to hold rates steady at next week's meeting.

The Remaining Concerns

Context matters here. Sentiment at 56.4 is still 21.3% below its level a year ago.

Consumers cite two ongoing concerns: elevated prices and softening labor markets. The inflation shock may be fading, but cumulative price increases over the past three years haven't reversed. A gallon of milk costs what it costs. Wage growth hasn't fully caught up.

Labor market anxiety is newer. December's jobs report showed the weakest hiring in years. Consumers notice when friends and family struggle to find work, and that filters into spending decisions.

Tariff concerns also featured in the survey. While worries about trade policy "appear to be gradually receding," respondents remain guarded about business conditions. The survey concluded January 19—two days after Trump's social media post announcing additional tariffs on eight European countries.

Market Implications

Better sentiment typically supports consumer spending, which drives roughly 70% of U.S. GDP.

Friday's data landed amid a mixed session. The S&P 500 eked out a 0.03% gain while the Dow dropped 285 points, dragged down by Intel's collapse and Goldman Sachs weakness. The Nasdaq rose 0.28% as tech outperformed.

For the week, equities showed caution despite the sentiment beat. The S&P 500 fell 0.5%, and the Dow lost 0.6%. Only the Nasdaq managed a gain, adding 0.2%.

What's Next

The Fed meets January 27-28. Markets price near-zero odds of a rate cut, with expectations for the first move pushed to June.

Next week's megacap earnings—Meta, Microsoft, Tesla, and Apple—will matter more for stocks than sentiment data. But the consumer backdrop is incrementally supportive.

If sentiment continues rising and inflation expectations keep falling, the Fed has room to cut later this year without reigniting price pressures. That's the soft landing scenario that seemed impossible in 2022 and now looks plausible.

Mark Zandi's forecast of three cuts in the first half may prove optimistic, but it's no longer laughable. Consumer confidence is rebuilding, one monthly survey at a time.