U.S. consumer sentiment dipped to start 2025 but remained essentially unchanged with the preliminary reading coming in at 73.2 in January vs. 74.0 in December 2024, and below expectations for 74.5 in the Econoday survey of forecasters.

"Assessments of personal finances improved about 5 percent, while the economic outlook fell back 7 percent for the short run and 5 percent for the long run," the report says."January's divergence in views of the present and the future reflects easing concerns over the current cost of living this month, but surging worries over the future path of inflation."

Year-ahead inflation expectations surged from 2.8 percent in December to 3.3 percent in January. This is the highest reading since May 2024 and is above the 2.3-3 percent range seen in the two years prior to the pandemic.

Long-run inflation expectations rose from 3 percent last month to 3.3 percent in January only the third time in the last four years that long-run expectations have had such a large one-month adjustment.

The first consumer sentiment reading of the year is expected to show another rise to 74.5, up from 74.0 in December and 71.8 in November. It would be a sixth consecutive monthly increase.

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.