Consumer sentiment is surging this month, up 9.1 points to 78.8 which far exceeds Econoday's consensus range where the top estimate was 72.5. This is an unusually large gain and follows December's 8.4-point jump in what was another unusual gain. January and December combined represent a 29 percent surge for the largest two-month increase since the end of the 1991 recession.

January's gain is evenly split between both current conditions, up 10 points to 83.3, and expected conditions, up 9.5 points to 75.9. Gains are also evenly split across demographics and also between Democrats and Republicans.

Cooling inflation expectations help explain the ongoing strength. Year-ahead expectations are down 2 tenths so far this month to 2.9 percent which is the lowest rate in more than 3 years, since December 2020. Five-year expectations, which have been stable throughout the inflation scare, are down 1 tenth to a 2.8 percent rate that was last posted in September last year.

These results leave the Relative Performance Index at 42 to indicate recent US data, on net, are easily exceeding estimates. When excluding inflation readings, the RPI also stands at 42. With inflation coming down and given strengthening consumer spirits (not to mention the strong labor market) the Federal Reserve may see little reason to cut interest rates anytime soon.

Consumer sentiment in the first indication for January, which in December jumped nearly 9 points to 69.7, is expected to slip back slightly to 69.2. Year-ahead inflation expectations are expected to hold at 3.1 percent.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.