(Bloomberg) — Short-term inflation expectations in the US fell to their lowest level in nearly two years in early January, providing a larger-than-expected boost to consumer confidence.
Respondents said they expect prices to rise 4% in the coming year, the lowest level since April 2021, the University of Michigan’s preliminary survey showed on Friday. The sentiment index rose from 59.7 at the end of the year to a nine-month high of 64.6, beating all estimates in a Bloomberg survey of economists.
Consumers expect inflation to rise by 3% over the next five to ten years, a slight increase from the previous month. The Federal Reserve pays particular attention to long-term views, as expectations can become self-fulfilling and lead to higher prices.
Data released Thursday showed that US inflation continued its downward trend in December, adding to evidence that price pressures have peaked and giving the Fed room to slow the pace of rate hikes next month.
Coupled with a strong job market, Americans are feeling increasingly optimistic about the economy and their finances. Prices at the pump have fallen sharply from summer highs, supermarket inflation has eased and unemployment has fallen to a five-decade low.
The university’s current personal finance gauge rose to an eight-month high, while expectations rose to a year’s highest. A majority of respondents said they expect their incomes to rise at least as fast as prices in the coming year, the most since October 2021.
Measures of current conditions and future expectations both reached their highest in nine months. Purchasing conditions for large household goods also improved, although consumers noted higher borrowing costs.
However, recession risks remain and are one of the factors preventing consumer confidence from returning to pre-pandemic levels. Many economists expect the Fed’s rate hikes to send the economy into recession sometime in the next year, driving up unemployment.
The economic outlook for the year ahead worsened but improved over the next five years to the highest since April, the report said.
“Two-thirds of consumers expect an economic downturn in the coming year, indicating how low sentiment remains despite recent improvements,” Joanne Hsu, director of the study, said in a statement.
“That said, given current historic lows in unemployment and strong expected incomes, a gradual slowdown in spending seems more likely than a cliff-edge decline,” she said.