Consumer Sentiment Improves Even as Financial Strains Persist

• Year-ahead inflation expectations declined to 4.0% in January, providing modest relief, though longer-term expectations edged higher indicating consumers remain unconvinced about price stability.
• Roughly two-thirds of consumers are living paycheck to paycheck, with fewer than half able to confidently handle a $1,000 unexpected expense without falling behind on obligations.
• Both current conditions and expectations indexes remain sharply below January 2025 levels, reflecting concerns about purchasing power, job security, and income growth trailing expenditures.

Summary: Consumer Sentiment Improves Amid Persistent Financial Pressures

Key Data Points:

The University of Michigan Consumer Sentiment Index rose to 56.4 in January 2026 from 52.9 in December, marking a reversal from year-end declines. However, sentiment remains over 20% lower than January 2025 levels, indicating significant year-over-year deterioration. Year-ahead inflation expectations declined to 4.0%, though longer-term expectations edged higher.

Main Findings:

The modest improvement stems primarily from easing inflation fears rather than genuine economic confidence. Both current conditions and expectations indices remain sharply below prior-year levels, with consumers expressing concerns about purchasing power and job security despite low actual layoff rates.

Financial Strain Indicators:

PYMNTS Intelligence research reveals approximately two-thirds of consumers live paycheck-to-paycheck, with fewer than half able to confidently handle a $1,000 unexpected expense. Real, inflation-adjusted personal income growth has lagged expenditures, constraining household financial buffers.

Market Implications:

The disconnect between solid GDP growth, stable jobless claims, and weak consumer confidence suggests households remain cautious about discretionary spending. Consumers continue prioritizing essential purchases while filtering spending decisions through concerns about income stability and unexpected expenses.

Outlook:

Future sentiment improvement depends heavily on sustained employment levels. While consumers acknowledge slowing inflation, many believe prices remain too high relative to income growth. The cautious household outlook indicates continued deliberate spending patterns, with limited optimism despite economic expansion.

Bottom Line:

The economy shows technical strength, but thin financial buffers and persistent inflation concerns prevent confidence from gaining meaningful traction at the household level—a disconnect that has characterized much of the past year.