Consumers Feeling Better About Inflation — Will They Feel Comfortable Spending?

woman clothes shopping, checking tag

Headed into the new year, consumers are confident about the economy, and about overall trends in inflation.

As reported by the University of Michigan’s survey of consumer sentiment, the latest reading came in a 78.8 for the month of January, which represents a 13% jump over December’s levels, and 21% higher than a year ago.

As for inflation expectations: Year-ahead inflation expectations declined month over month to 2.9% in January, where they had been 3.1% in December, and 3.9% a year ago.

Over the longer term, five years, long-run inflation expectations were ratcheted down to 2.8%, down from 2.9% in December, and the 3.2% seen in November. PYMNTS estimated earlier this year that consumers saw a late 2024 timeframe until inflation would return to more normalized (and pre-pandemic) levels.

“Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” Surveys of Consumers Director Joanne Hsu said in a statement that accompanied the data release on Friday (Jan. 19). “Sentiment has now risen nearly 60% above the all-time low measured in June of 2022 and is likely to provide some positive momentum for the economy.”

The January readings on sentiment come after December’s details on retail sales, which would dovetail with the positive sentiment. After all, if consumer see their own prospects improving, and inflation becoming manageable, then it follows that they’d be more inclined to open their wallets. The retail sales data from December of course has been buoyed by the holiday shopping season. But as we reported on Thursday, when PYMNTS Intelligence adjusted the latest government data for inflation, it appears that individuals are buying more — in terms of quantity — across several categories of spend.

Not Everything May Be Rosy

There are a few data points in the mix that signal some volatility in spending may be a hallmark in the months ahead. It’s well known that consumers have been adding to their debt loads. And the Federal Reserve’s own, separate take on consumer expectations found a more positive outlook on inflation.

But the Fed also found what may be some lingering concerns over meeting the monthly debt obligations. Earlier this month the Fed reported that the “average perceived probability of missing a minimum debt payment” over the next three months increased by 0.6% to 12.4%. That level is above the trailing 12-month average of 11.5%. PYMNTs has found that consumers have had to tap into savings to offset inflation, and turned to credit to help fund holiday spending plans. The Fed also found late last year that only about two-thirds of consumers felt they’d be able to meet the demands of an unexpected $2,000 expense.

So while inflation expectations may be coming down, there are other factors at play determining just how resilient consumer spending will be in the months ahead. The payment networks, Visa and Mastercard among them, are due to report earnings through the next several weeks, and will give some indication on how spending has held up since the end of the fourth quarter. They’ll also weigh in on missed payments and delinquency rates.