US Consumer Sentiment Hits 5-Month Highs As Inflation Worries Fall To 1-Year Low

American households are starting 2026 on firmer footing, with sentiment ticking up to its highest level in five months and inflation worries slipping to levels not seen since early 2025, just as food prices tumble across grocery aisles.

The University of Michigan’s revised consumer sentiment index for January came in at 56.4 on Friday, comfortably above the preliminary 54.0 estimate and December's 52.9 reading.

It marked the second consecutive monthly rise and the best showing since August.

“While the overall improvement was small, it was broad based, seen across the income distribution, educational attainment, older and younger consumers, and Republicans and Democrats alike,” said Joanne Hsu, director of the University of Michigan's Surveys of Consumers.

She added, however, that overall sentiment remains more than 20% below its level from a year ago.

Inflation Expectations Retreat, Driven By Food Price Drop

One of the main reasons for improving sentiment lies in diminishing inflation expectations. Year-ahead inflation projections dropped to 4.0%, down from 4.3% last month and the lowest reading since January 2025.

Longer-term expectations inched up slightly to 3.3% from December's 3.2%, still within a manageable range for policymakers.

Food prices, a key pressure point for households over the past two years, are now moving in the opposite direction.

According to Bank of America economist Sara Senatore, deflation is gaining traction across major agricultural commodities in the fourth quarter of 2025.

Notably, sugar prices fell 16.6% year over year, oil declined 11.1%, wheat dropped 10.9% and cheese slid 7.5%. Even milk, which had been more stable, saw a 1.9% year-over-year deflation.

Retail egg prices saw the steepest drop, plunging 26% in January after peaking at +108% year-over-year inflation in March 2025. Chicken breast prices declined 21% and wing prices collapsed 48% year over year.

Bank of America highlights that animal proteins like beef and chicken represent the largest share of input costs, making up 25%–35% of cost of goods sold for most restaurant chains.

Chains like Texas Roadhouse Inc. (NASDAQ:TXRH), McDonald's Corp. (NASDAQ:MCD), and Cracker Barrel Old Country Store Inc. (NASDAQ:CBRL) will likely see margin relief later this year if deflation persists.

Broader US Economy Gathers Steam

Broader economic indicators continue to point to strong growth without overheating.

On Thursday, the Bureau of Economic Analysis revised the third-quarter GDP growth from 4.3% to 4.4%, while the Atlanta Fed's GDPNow model projects an even faster 5.4% expansion for the fourth quarter.

The strength in economic output hasn't translated into resurgent inflation. The personal consumption expenditures (PCE) price index rose 2.8% year over year in November, with core PCE — the Federal Reserve's preferred gauge — also at 2.8%, both matching expectations.

Flash Purchasing Managers' Index (PMI) data from S&P Global also showed the U.S. private sector expanding in January, with the composite index at 52.8. A reading above 50 indicates growth.

The services PMI held steady at 52.5, while the manufacturing sector signaled an expansion for the sixth straight month.

“The flash PMI brought news of sustained economic growth at the start of the year, but there are further signs
that the rate of expansion has cooled over the turn of the new year compared to the hotter pace indicated back in
the fall,” commented Chris Williamson, chief business economist at S&P Global Market Intelligence.

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