US consumer sentiment rises in January, though worries over prices, jobs persist

• Year-ahead inflation expectations eased to 4.0% from 4.2% preliminary reading, the lowest since January 2025, while five-year expectations slipped to 3.3%
• Consumer spending remained resilient in October and November despite sour sentiment, supporting strong economic growth in Q4 2025 and continuing the post-pandemic pattern of behavior diverging from sentiment
• Potential tariff escalations pose a risk to future sentiment, though brief episodes of trade rhetoric have not yet shifted consumer views on the domestic economy

Summary

Key Findings:

The University of Michigan's Consumer Sentiment Index rose to 56.4 in January 2026, up from 54.0 preliminary and 52.9 in December, beating economist expectations. Despite the improvement, sentiment remains more than 20% below year-ago levels and deeply depressed by historical standards.

Sentiment Context:

The recent confidence decline ranks among the sharpest in the survey's 70-year history, comparable only to 2022's peak post-pandemic inflation and last spring's global tariff announcements by President Trump. Improvements were broad-based across income levels, education, age groups, and political affiliations.

Inflation Expectations:

One-year inflation expectations eased to 4.0% from 4.2% preliminary—the lowest since January 2025. Five-year expectations declined to 3.3% from 3.4%, though slightly above December's 3.2%. While inflation has moderated significantly, cumulative price impacts continue frustrating households.

Economic Behavior:

Despite negative sentiment, consumer spending remained robust. Commerce Department data showed solid October-November gains, likely supporting strong Q4 2025 economic growth. This persistent divergence between sentiment and actual spending behavior has characterized the post-pandemic economy.

Market Implications:

The Federal Reserve monitors inflation expectations closely, concerned that entrenched price fears could create self-reinforcing inflationary cycles through spending and wage-setting behavior. Survey director Joanne Hsu noted consumers face ongoing pressures from high prices and weakening labor market prospects.

Tariff Risks:

Recent Trump tariff threats against eight European countries haven't yet impacted sentiment, with tensions easing after NATO negotiations. However, prolonged trade uncertainty could weigh on consumer confidence, similar to last spring's tariff disputes.