Lower inflation makes consumers more optimistic about the economy

Consumers are finally feeling some relief from price pressure.

The University of Michigan's consumer sentiment index improved to 67.8 in August, rising for the first time in five months. Recent reports show a slowdown in inflation as annual price increases move back toward the Federal Reserve's 2% target.

“Recent encouraging developments toward a return of inflation to the FOMC's target range have given consumers reason for some more optimism,” wrote Wells Fargo economists Tim Quinlan and Jeremiah Kohl. The Federal Open Market Committee (FOMC) is the Fed's monetary policy body. In order to curb inflation, it has kept interest rates at their highest level in twenty years for two decades.

The University of Michigan survey is more sensitive to inflation numbers than other consumer surveys, which is why the numbers were dismal last year as inflation remained stubborn.

Consumers expect inflation to be 2.9 percent a year from now, in line with their predictions last month. Fed officials closely monitor consumer inflation expectations because people act on those predictions, which can influence both price setters and wage payers.

Future economic expectations are rising

Consumers said they had a better assessment of the economic outlook but were less satisfied with the current situation.

“Overall, expectations rose both for personal finances and for the economic outlook for the next five years, reaching their highest level in four months,” said Joanne Hsu, director of the University of Michigan Consumer Survey.