A measure of consumer sentiment by the University of Michigan has jumped in the past two months by the most since 1991, the Associated Press reports, and a survey by the Federal Reserve Bank of New York found that Americans’ inflation expectations have reached their lowest point in nearly three years. The same survey, released last week, found that the proportion who expect their own finances to improve a year from now is at its highest level since June 2021.
Economists say consumers appear to be responding to steadily slower inflation, higher incomes, lower gas prices, and a rising stock market.
The dichotomy of a rapid fall in inflation with a still-elevated cost of living will likely set up a key question in the minds of voters, many of whom are still feeling the lingering financial and psychological effects of the worst bout of inflation in four decades. Which will carry more weight in the presidential election: The dramatic decline in inflation or the fact that most prices are much higher than they were three years ago?
The public’s growing optimism about the economy could point to newfound enthusiasm for Biden’s candidacy this year after weak polling has defined much of his time in office, but politics might limit how much public sentiment can improve. The University of Michigan survey found that consumer sentiment among Democrats jumped a sharp 11.8% in January, the second-largest such increase on record.
Many Americans might still favor having the government take steps not only to slow inflation but also to try to reduce overall prices to where they were before the pandemic. Economists, though, uniformly caution that any attempt to do so would require a significant weakening of the economy, resulting from either sharp interest rate hikes by the Fed or tax increases. The likely consequence could be a recession that would cost millions of jobs.
