Easing inflation pressures lift consumer sentiment

Sentiment among U.S consumers was more positive in December as inflation concerns eased to a 15-month low.

Overall consumer sentiment rose 5% to 59.7 in December, according to The University of Michigan Surveys of Consumers, up from 56.8 in November. Although consumers’ extremely negative attitudes softened in December, sentiment remains relatively downbeat, remaining 15% below a year ago  —this month over easing pressures from inflation, said U-M economist Joanne Hsu, director of the surveys.

“Consumers clearly welcomed the recent easing of inflation,” said Joanne Hsu, director of the surveys.  “While sentiment appears to have turned a corner from its all-time low from June, consumers have reserved judgment about whether the trends will continue. Their outlook for the economy may have improved, but it remains relatively weak. The sustainability of robust consumer spending is contingent on continued strength in incomes and labor markets in the quarters ahead.”

Inflation

A declining share of consumers blamed high prices for poor buying conditions for durable goods, cars and homes. Similarly, following a peak in July, fewer consumers spontaneously mentioned food prices during their interviews. About 25% of consumers reported hearing news about inflation, down from the peak of 38% in June 2022, but well above the 17% from June 2021.

Year-ahead inflation expectations improved considerably but remained elevated, falling from 4.9% in November to 4.4% in December, the lowest reading in 18 months but still well above two years ago, Hsu noted.

Declines in short-run inflation expectations were visible across the distribution of age, income, education, as well as political party identification. At 2.9%, long-run inflation expectations have stayed within the narrow, albeit elevated, 2.9-3.1% range for 16 of the last 17 months.

While the sizable decline in short-run inflation expectations may be welcome news, consumers continued to exhibit substantial uncertainty over the future path of prices

Economic outlook improves

Consumer expectations for the economy in the short run and the long run improved considerably, Hsu said. Both reached their most favorable reading in eight months, in large part due to the easing of price pressures.

Despite this recent improvement, the general view for the economy remains relatively negative as 65% of consumers expect unfavorable developments in the year ahead. Furthermore, unemployment expectations continued to worsen. About 45% of consumers expect unemployment to rise in the year ahead, the largest share since April 2020 as the economy shut down from the pandemic.

The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone.