Evening Brief – 01.19.24
Consumer Sentiment Soars
In October and November, there was a notable increase in inflation expectations, reflecting a period of heightened concerns or anticipation of higher inflation in the future.
And after declining sharply in December, consensus estimates for University of Michigan inflation expectations in preliminary January data were basically unchanged. Instead, today’s report showed that expectations declined even further to 2.9% for one-year and 2.8% for five to 10 years.
The decline in inflation expectations, especially for longer-term horizons, suggests that respondents are adjusting their views on the inflationary outlook. Financial markets are sensitive to inflation expectations. Changes in these expectations can influence bond yields, interest rates, and investment decisions across asset classes.
The subsiding fear about inflation drove the overall sentiment index up 9.1 points to 78.8, the largest monthly increase since 2005. The current conditions gauge rose 10 points to 83.3, and a measure of expectations climbed to 75.9. Both were the highest since 2021.
The increase in both indicators is generally a positive signal for the economy. Rising consumer sentiment is often associated with increased consumer spending, which plays a crucial role in driving economic growth.
“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,” said Joanne Hsu, director of the survey. “Consumers exhibited stronger views on multiple facets of the economy, suggesting greater confidence of a soft landing.”
According to the survey, optimism has increased across all age groups, income levels, and political affiliations. More than half of households expect their incomes to grow at least as fast as inflation, the highest percentage since mid-2021.
Furthermore, the survey revealed that stock market expectations were at their highest level in more than two years. Consumers’ perception of their current financial situation rose to a two-year high, while expectations for future finances climbed to the highest since 2021.