Americans are feeling marginally better about the economy to start 2026, but only marginally. The University of Michigan's closely watched consumer sentiment index edged up to 54 in January from 53 in December, marking the second consecutive monthly increase and slightly exceeding the consensus forecast of 53.5.

The modest improvement, however, does little to mask an uncomfortable truth: consumer confidence remains deeply depressed by historical standards. January's reading sits roughly 30 points below the survey's 70-year average and uncomfortably close to the all-time low of 50 hit during June 2022's inflation peak.

The Sentiment Paradox

Perhaps the most striking aspect of the January data is the gap between current sentiment and year-ago levels. In January 2025, the index stood at 71.7—meaning Americans feel dramatically worse about the economy today despite continued job growth and falling inflation.

This disconnect between hard economic data and consumer perception has puzzled economists for months. The labor market remains historically tight, with unemployment at 4.4%. GDP growth continues to track above 2%. Yet consumers can't shake the feeling that something is wrong.

Income Divide Widens

Beneath the headline number lies a revealing divergence. Sentiment gains in January were concentrated among lower-income consumers, while higher-income households actually reported declining confidence.

This pattern inverts traditional economic logic, where wealthy consumers typically maintain steadier confidence. Some analysts attribute the shift to:

  • Stock market volatility: Higher-income consumers hold more equities and feel portfolio fluctuations more acutely
  • Housing wealth effects: Elevated mortgage rates have frozen the housing market, diminishing the "wealth effect" from home appreciation
  • Political uncertainty: Policy concerns may weigh more heavily on those with more to lose from potential changes

Inflation Expectations: The Fed's Dilemma

Year-ahead inflation expectations held steady at 4.2% in January—the lowest since January 2025 but still well above the 3.3% reading from a year ago. More concerning for the Federal Reserve, long-term inflation expectations ticked up to 3.4% from 3.2% in December.

"Consumers continue to worry about high prices and a softening labor market, though concerns about tariffs appear to be gradually easing."

— University of Michigan Surveys of Consumers

The persistence of elevated inflation expectations complicates the Fed's path forward. Even as actual inflation moderates toward the 2% target, consumers' belief in higher future prices could become self-fulfilling if it influences wage demands and purchasing behavior.

The Tariff Shadow

Morningstar's 2026 inflation forecast projects price increases accelerating to 2.7% as businesses pass more tariff costs to consumers. Their models suggest durable goods prices could rise a cumulative 4.5% through 2027, with nondurable goods climbing 5.6%.

While these increases pale compared to the 2021-2023 inflation surge, they represent a significant departure from the pre-pandemic price stability consumers had grown accustomed to.

What It Means for the Economy

Consumer sentiment matters because it influences spending decisions—and consumer spending accounts for roughly 70% of U.S. economic activity. The persistent gap between confidence and actual economic conditions creates uncertainty about:

Spending Resilience

Despite low sentiment readings, consumers continued spending robustly through the 2025 holiday season. November retail sales surged 0.6%, and early 2026 data suggests the momentum carried through. Whether consumers can sustain this disconnect between how they feel and how they spend remains an open question.

Savings Behavior

Low confidence typically encourages precautionary saving, which could slow economic growth. However, excess savings from the pandemic era have largely been depleted, limiting consumers' ability to increase savings rates without cutting spending.

Credit Demand

Nervous consumers tend to avoid taking on new debt, potentially dampening demand for auto loans, mortgages, and credit cards. Early signs of credit stress—auto loan delinquencies recently hit 15-year highs—suggest some households are already stretched.

The Path Forward

For sentiment to meaningfully recover, consumers likely need to see one or more of the following:

  • Visible progress on inflation, particularly in housing and food costs
  • Clarity on the policy environment, including trade and tax policy
  • Sustained employment stability without high-profile layoff announcements
  • Stabilization in interest rates that makes big-ticket purchases more accessible

Until then, the American consumer appears caught in a paradox: spending freely while feeling pessimistic, maintaining the economy's growth while expressing doubt about its direction. It's a precarious balance that bears watching as 2026 unfolds.