Consumer sentiment brightens to highest level since April

Key drivers

The continuing strength of the job market and easing inflation showed signs of filtering down into the individual level, as consumers’ personal finance assessments rose 16% to its highest level in eight months.

That’s leaving people more optimistic about the future. The long-run outlook also rose 7% to its highest level in nine months.

On inflation, expectations were lower to start January, scaling back to an expected 4% for the year-ahead, which is down from 4.4% last month and the lowest reading since April 2021. This week’s third straight Consumer Price Index report that showed a substantial cooling of inflation will no doubt help to bolster this sentiment.

Long-run inflation expectations were again in the narrow range of 2.9-3.1%. That’s especially important to economic policymakers, who don’t want to see consumers believing that high inflation is becoming a feature of the economy, rather than a bug. If people expect inflation to keep rising quickly, they will start asking for higher and higher wages, prompting brands and retailers to course-correct to what people can afford. That would keep driving prices higher in an upward spiral.

But remember: Sentiment is still historically low. While there are signs of improvement, this period of inflation has weighed on consumers. Sentiment reached historic lows in June, and is still digging out. In the January data, inflation measures are still well below pre-pandemic levels. Overall sentiment clocked in 4% below December 2021. The long-run outlook is 17% below historical norms.

It's not just inflation. The constant swings in the economy of the last three years of pandemic, supply chain, war in Ukraine and then price increases also lead to more caution. Consumers hold back because they don’t know what’s going to happen next. The tough-to-predict results of this year’s convergence of still-high inflation and rising interest rates adds another wrinkle.

“Uncertainty over both inflation expectations measures remains high, and changes in global factors in the months ahead may generate a reversal in recent improvements,” Hsu wrote.