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Consumer Sentiment Holds Gains While Long-Run Inflation Expectations Remain Stuck in High Gear

Consumers reduced their spending at retail stores in January, but not because they were feeling worse about the economy and its outlook.

A preliminary survey of Americans’ financial health released in February by the University of Michigan showed on Friday that consumer sentiment continued to rise from the past two months. The consumer confidence index was 79.6, slightly up from 79 in January.

“Consumer sentiment remains essentially unchanged since January, with an increase of 0.6 index points this month, ensuring a significant increase from the past two months,” said research director Joan Hsu. Ta. “The fact that sentiment did not collapse at all this month suggests that consumers continue to feel more confident about the economy, with December and January seeing significant improvements in various aspects of the economy. It was done.”

Confidence that inflation will continue to decline and the labor market will remain strong is driving sentiment.

But recent economic data could shake half of that foundation. The labor market remains strong, with 353,000 jobs added in January and the unemployment rate held at 3.7%, but the decline in inflation seen last year is now in doubt. The Consumer Price Index, Producer Price Index, and Import Price Index all showed larger-than-expected increases in inflation.

Inflation expectations rose slightly in February, with consumers expecting inflation to remain at 3% over the next year, up from 2.9% the previous month.

Long-term inflation expectations remained at 2.9% for three straight months, and in a narrow range of 2.9% to 3.1% for 28 of the past 31 months. While there is some comfort that long-term expectations have not risen, there are also reasons to be cautious about the fact that they appear to remain high. Long-term inflation expectations were between 2.2% and 2.6% in the two years before the pandemic.

The Commerce Department said in a separate report this week that retail sales fell sharply in January compared to the previous month. Sales decreased at car dealerships, gas stations, electronics retailers, online stores, and home centers. Sales at grocery stores, restaurants, and department stores increased.

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