U.S. consumer sentiment improved this month, with January's preliminary reading coming in at 54.0 vs. 52.9 in December and 51.0 in November. This is better than the consensus of 53.5 in the Econoday survey of forecasters. The uptick in confidence was primarily among lower-income households, while mood among higher income consumers souring.

All told, while consumers perceived some modest improvement in the economy over the past two months, their sentiment remains nearly 25 percent below last January's reading, the report noted. Although consumers' worries about tariffs appear to be gradually receding, they remain guarded about the overall strength of business conditions and labor markets.

Preliminary year-ahead inflation expectations was unchanged at 4.2 percent in January, from December. This is the lowest reading since January 2025 but remains well above that month's 3.3%, the report said.

Long-run inflation expectations in January rose to 3.4 percent from 3.2 percent last month.

In comparison, readings ranged between 2.8 and 3.2 percent in 2024, and were below 2.8 percent throughout 2019 and 2020, the report said.

Sentiment seen up marginally to 53.5 in the first report for January from 52.9 in December.

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.