January consumer sentiment beat expectations but remains below last year as inflation worries and labor market uncertainty persist.
A consumer sentiment reading for January came in ahead of expectations, raising hopes of a turnaround after it plunged to a nearly three-year low in November last.
Subdued Improvement: The preliminary reading of the University of Michigan’s consumer sentiment index for January was 56.4, up from December's 52.9, although significantly lower than the year-ago reading of 71.7. Economists, on average, estimated a reading of 54 for the month.
Indices measuring consumers' assessments of current economic conditions and the future also improved from a month ago, while remaining markedly below year-ago levels.
Prices, Labor Market Worry Consumers: Director of the survey, Joanne Hsu, said the improvement was small but was broad-based. “However, national sentiment remains more than 20% below a year ago, as consumers continue to report pressures on their purchasing power stemming from high prices and the prospect of weakening labor markets,” she said.
Inflation Expectations Improve But Stay Elevated: The year-ahead inflation expectations fell to 4%, marking the lowest since Jan. 2025, when the metric was at 3.3%. Economists had expected a hotter number of 4.2%.
Inflation expectations, both near and longer-term, are far above the 2% the Federal Reserve targets.
Comerica Chief Investment Officer Eric Teal, however, is optimistic. “If the tariffs and trade worries moderate and employment concerns stay contained, we expect sentiment to continue to improve,” the strategist said.
Read-Across For Interest Rate: Consumer morale remains low, with ongoing geopolitical tensions and rate uncertainty likely acting as pushbacks. But inflation's stickiness may leave the Fed in a dilemma as its monetary policy-setting arm meets next week to decide on interest rates.
After three straight rate cuts, the central bank under Jerome Powell may be inclined to pause to assess their impact.
Read Next: Yen Jumps on Hawkish BoJ Hold; USD/JPY Rally Fades Ahead of Fed Risk Event