As Inflation Sinks, Optimism Hits 8-Month High

Inflation is in retreat, and people have noticed: Consumer sentiment jumped to an eight-month high in early January, buoyed by lower prices.

That’s according to January’s edition of the University of Michigan’s Consumer Sentiment Index, released Friday. The poll, which surveys U.S. adults on their feelings about the economy and their own finances, had hit an all-time low in June amid soaring inflation but has been on the upswing since then. 

This month, the index rose to its highest level since April. Those surveyed in early January had a generally sunnier outlook as inflation lost its teeth and personal finances subsequently improved.

The survey shows that the past several months of cooling inflation have not gone unnoticed. Price increases for consumer goods declined to 6.5% over the year in December, down from their peak of 9.1% in June, the Bureau of Labor Statistics reported Thursday. What’s more, the consumer price index has only risen at a 1.8% annual rate in the last three months, below even pre-pandemic levels. 

The Michigan survey showed that people had revised their expectations accordingly, with year-ahead inflation expectations falling to 4%, down from 4.4% in December and hitting their lowest since April 2021. 

Public feelings about future price hikes are important because economists believe inflation expectations have a way of becoming self-fulfilling prophecies. (The theory goes that when people expect high inflation, they behave in ways that could drive it upwards, such as negotiating higher wages, causing companies to raise prices.) 

Despite the improved short-term outlook, people’s long-term inflation predictions actually worsened slightly, with the five-year inflation prediction inching up to 3% from 2.9% in December. It stayed above pre-pandemic levels when the figure hovered around 2.5%. Higher long-run inflation expectations are troubling because they raise the possibility of inflation making a comeback at some point down the road. 

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