American consumer confidence showed modest improvement in the first half of January, but the headline gains mask what remains a deeply pessimistic outlook among U.S. households. The University of Michigan's preliminary consumer sentiment index rose to 54.0, up from December's 52.9 reading and slightly above economist expectations of 53.4.
The uptick marks the highest reading since September 2025, offering a glimmer of hope that consumer attitudes may be stabilizing after a bruising 2025. Yet the modest improvement should be viewed in context: at 54, the index sits roughly 30 points below its historical average and just 4 points above the all-time low of 50 recorded in June 2022 at the peak of pandemic-era inflation.
What the Numbers Show
Breaking down the data reveals a nuanced picture of the American consumer psyche heading into 2026. Gains were concentrated among lower-income households, who may be benefiting from moderating inflation on essentials like groceries and gasoline. In contrast, sentiment among higher-income consumers actually slipped, potentially reflecting concerns about stock market volatility and the uncertain policy environment.
Year-ahead inflation expectations held steady at 4.2%, the lowest reading since January 2025 but still well above the 3.3% recorded a year ago. Consumers continue to expect elevated price pressures, even as official inflation measures have moderated from their 2022 peaks.
"Overall, US households reported modest improvement in economic perceptions over the past two months, but sentiment remains nearly 25% below January 2025 levels."
- University of Michigan Surveys of Consumers
Long-Term Inflation Concerns Tick Higher
More concerning for Federal Reserve policymakers, long-term inflation expectations rose to 3.4% from 3.2% in December. The increase suggests consumers are not fully convinced that inflation will return to the Fed's 2% target anytime soon, a view that could complicate monetary policy decisions throughout 2026.
The Fed watches inflation expectations closely because they can become self-fulfilling. If workers expect higher inflation, they demand larger wage increases. If businesses expect higher costs, they raise prices preemptively. Anchored expectations are considered crucial to achieving actual price stability.
Why Sentiment Remains Depressed
Several factors continue to weigh on consumer attitudes despite improvements in some economic indicators. The labor market, while still historically tight by some measures, has cooled considerably from its post-pandemic peak. The Bureau of Labor Statistics revised 2024 job gains down by over 900,000 positions, and 2025's hiring pace was the weakest since the pandemic itself.
Credit conditions have also tightened. Americans hold a record $1.2 trillion in credit card debt, with average interest rates exceeding 21%. Student loan repayments resumed after years of pandemic-era pauses. Auto loan delinquencies have risen to their highest levels in decades.
The Price Memory Effect
Perhaps most importantly, consumers are dealing with what economists call price memory. While inflation rates have declined from their 2022 highs, prices themselves have not fallen. A gallon of milk that cost $3.50 in 2021 might cost $4.50 today, even if the rate of increase has slowed. Consumers judge their financial well-being based on absolute price levels, not inflation rates.
This phenomenon helps explain why sentiment remains so depressed despite official inflation cooling. Households have experienced a permanent reduction in purchasing power, and wage gains for many workers have not kept pace with cumulative price increases since 2020.
Implications for the Economy
Consumer spending accounts for approximately 70% of U.S. economic activity, making sentiment readings a leading indicator of potential demand shifts. While the modest January improvement is welcome, the absolute level of confidence raises questions about spending growth in 2026.
Forecasters at Moody's expect real consumer spending growth to decelerate to around 1.5% in 2026, down from approximately 2.2% in 2025. The personal savings rate has fallen to 4.2%, leaving households with limited cushion to maintain spending if income growth slows or unexpected expenses arise.
Retail Implications
Retailers are watching sentiment readings carefully. Value-focused chains like Walmart and Dollar General have reported stronger-than-expected results as consumers trade down from premium brands. Meanwhile, discretionary retailers selling furniture, electronics, and apparel face tougher conditions as households prioritize necessities.
The bifurcated spending pattern reflects the K-shaped recovery that has defined the post-pandemic economy. Higher-income households with stock portfolios and home equity have maintained spending power, while lower-income families increasingly rely on credit to cover basic expenses.
What to Watch
The final January consumer sentiment reading will be released in approximately two weeks. Markets will parse the data for signs that the preliminary improvement is sustainable or merely a brief reprieve in a longer downtrend.
Several catalysts could shift sentiment in either direction. Positive developments on housing affordability, continued moderation in grocery prices, or labor market stabilization could support confidence. Conversely, renewed inflation pressures, significant stock market volatility, or rising unemployment would likely push sentiment lower.
The Bottom Line
January's preliminary consumer sentiment reading of 54.0 represents marginal improvement but not a fundamental shift in how Americans view their economic prospects. With confidence still mired near historic lows and inflation expectations elevated, the consumer backdrop for 2026 remains challenging. Retailers, restaurants, and service providers dependent on discretionary spending face continued headwinds until sentiment meaningfully recovers.
