Consumer moods brightened dramatically and inflation expectations receded further in early January, the preliminary read on University of Michigan sentiment, released on Friday, showed.
The headline gauge, which likewise jumped in December, rose to 78.8, up 13%.
Remarkably, the 9-point month-to-month increase was even larger than December’s jump, which was itself quite pronounced. (The percentage increase was larger last month.)
“Consumer sentiment soared in January, showing that the sharp increase in December was no fluke,” survey director Joanne Hsu said Friday.
Both the current conditions and expectations indexes increased sharply. All five index components rose.
Hsu marveled at the sheer scope of the two-month gain on the headline gauge. The cumulative 29% increase counts as the largest two-month surge in 32 years.
If there was a “whole-of-government” (so to speak) effort to engineer a rebound in consumer moods headed into an election year, it worked.
In explaining the blockbuster read, Hsu cited a much improved outlook on prices and a commensurate improvement in households’ views around their financial prospects. “Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” she said.
In great news for the Fed, December’s decline in inflation expectations continued. Year-ahead expectations fell to just 2.9%. That builds on the downward momentum from December, when the 12-month outlook plunged from 4.5% to 3.1%.
Longer-term expectations slipped below their post-pandemic range, to 2.8%, matching the local low from September.
Suffice to say this release constituted an unequivocally positive development. Note that the headline beat was more than eight full points. Consensus was 70.1. The highest guess from 53 economists was 72.5.
“It was encouraging from the Fed’s perspective — elevated confidence and lower inflation expectations,” BMO’s Ian Lyngen remarked.
Hsu went on to say that sentiment is now up 60% from the record lows (marked in orange on the first chart above) and just 7% below the historical average in data back to 1978.
