Optimism hits 8-month high as inflation eases

Inflation is retreating, and people have noticed: Consumer sentiment rose to an eight-month high after low prices in early January.

That's according to the January edition of the University of Michigan's consumer sentiment index released Friday. A survey of US adults' feelings about the economy and their finances hit an all-time low in June, but has been on the rise since then.

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

The survey shows that the cooling of inflation in the last few months has not gone unnoticed. Consumer prices fell 9.1% in December from a peak in June, the Bureau of Labor Statistics reported Thursday. Moreover, the consumer price index has been lower for the past three months, even below pre-pandemic levels.

The Michigan survey showed people revised their expectations in line, with inflation expectations for the year falling to 4% from 4.4% in December, the lowest since April 2021.

Public sentiment about future price increases is important because economists believe inflation expectations have a way of turning into self-fulfilling prophecies. (The theory is that when people expect high inflation, they behave in ways that can drive it up, such as negotiating higher wages, causing companies to raise prices.)

Despite the improvement in the short-term outlook, people's long-term inflation expectations actually worsened slightly, with the five-year inflation forecast rising to 3% from 2.9% in December. That figure remained above pre-pandemic levels, when it hovered around 2.5%. Higher long-term inflation expectations are a concern because they increase the likelihood of inflation at some point down the road.

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