If inflation continues to decline slowly and steadily, consumer confidence will recover from last year’s trough.
The University of Michigan’s closely watched consumer sentiment index rose to 64.6 in a preliminary January survey, according to data released Friday. That was the highest reading since January 2022, up 8.2% from December’s reading of 59.7, but still 3.9% below 12 months ago.
Economists had expected the index to come in at just 60.5, according to the Refinitiv consensus estimate.
Some of the biggest boosts to optimism came from consumers’ feelings about current economic conditions: the index jumped 15.5% to 68.6 from the end of December.
Lower gasoline prices and falling inflation are helping boost morale, as is a strong labor market, Joanne Hsu, director of consumer surveys at the university, said in an interview with Bloomberg Television on Friday.
“Consumers expect their incomes to be strong,” she said, adding they also expect a weaker labor market this year.
The survey also showed consumers expect inflation to be 4% this year and 3% over the next five years. The reading on inflation expectations for the coming year was at its lowest level since April 2021.
Inflation expectations are a key data point for the Fed. If consumers believe prices will remain high, this could lead to higher demand for wages, which would lead businesses to raise prices.
Hsu said the Fed is paying particular attention to longer-term expectations, which have rebounded in the 3 percent range in 17 of the past 18 months.
“I do think consumers are still waiting to see continued improvement [in inflation] Uncertainty about global factors such as China and Ukraine will not worsen. ”