Consumer sentiment surges while inflation outlook dips, University of Michigan survey shows

Consumers have grown more confident about the direction of the economy and inflation at onset of 2024, despite persistent worries about a looming slowdown, a survey released Friday showed.

The University of Michigan’s Consumer Survey of Consumers showed a reading of 78.8 for January, its highest level since July 2021 and up 21.4% from a year ago. That followed a big jump in December and comes despite public opinion surveys showing concern about the nation’s direction.

On a two-month basis, sentiment showed its largest increase since 1991, said Joanne Hsu, the survey’s director.

“Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” Hsu said. “Democrats and Republicans alike showed their most favorable readings since summer of 2021. 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.”

Along with the improved outlook on general conditions, survey respondents displayed more confidence that inflation is coming down.

The outlook for the inflation rate a year from now declined to 2.9%, down from 3.1% in December for the lowest reading since December 2020. The Federal Reserve has boosted short-term interest rates to their highest level in more than 22 years and inflation has followed suit lower, though it remains above the central bank’s 2% target.

At the same time, the survey’s index of current conditions also leaped higher, rising to 83.3, or 21.6% higher than a year ago.

The survey is “another sign that the economy is on track for a soft landing,” said Andrew Hunter, deputy chief economist at Capital Economics. However, he noted that such surveys don’t always feed through to consumer behavior.

Stocks rose slightly following the release while Treasury yields also were higher.

Market have been tethered to expectations for where the Fed will take interest rates this year. The prevailing outlook is for a series of up to six quarter percentage point cuts this year. But the timing of those cuts is unclear, with market pricing now pointing to a tossup as to whether the Fed eases in March or waits until May.