A small upward revision puts the January University of Michigan consumer sentiment index at 79.0, a nearly 10-point climb from 69.7 in December, and the highest since 81.2 in July 2021. The reading for January is in line with the consensus of 78.8 in the Econoday survey of forecasters.

It appears that consumers are finally feeling relief from inflation, less worried about rising interest rates, and are more confident about the labor market. If confidence is below the near-term peak of 86.5 in April 2021, it looks like consumer sentiment is back to being consistent with moderate economic expansion and easing inflation without immediate fear of a recession that will lead to big job losses.

The current conditions index is 81.9 in January, up from 73.3 in December, and the highest since 81.4 in July 2021. The expectations index is 77.1 in January, up from 66.4 in December, and the highest since 79.0 in July 2021.

The 1-year inflation expectations measure is 2.9 percent for January, down from 3.1 percent in December, and significantly below the 3.9 percent in January 2023. It is now back to the sorts of readings seen in the pre-pandemic period. The 5-year inflation expectations measure is also 2.9 percent for January, the same as in December and in January 2023. Inflation expectations for the medium term have been fairly steady in a narrow range around the 2.9 percent-mark for most of the current inflation episode. It lends credibility to the Fed's ability to get inflation under control closer to the 2 percent objective, and means that inflation expectations have not become entrenched. However, readings remain a bit more elevated than those before Covid suggesting that inflation is anticipated to be a bit higher than previously.

Consumer sentiment is expected to end January at 78.8, unchanged from the preliminary reading and up a substantial 9.1 points from December which itself was up 8.4 points from November for the biggest two-month gain since the end of the 1991 recession.

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.