This week alone, data showed noticeable slowdowns in the Consumer Price Index - the broadest measure on US inflation - and the Producer Price Index - which tracks selling prices received by domestic producers for their output. But the UMich Consumer Sentiment Survey released on Friday showed a preliminary reading of 72.6 for July - the highest since September 2021.
"The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets," University of Michigan Surveys of Consumers Director Joanne Hsu said in a statement on Friday.
The increase underscores what could be one of the Fed’s bigger concerns - consumers thinking inflation was ebbing were beginning to spend big again.
According to UMich, all components of its Consumer Sentiment index improved considerably in July, led by a 19% surge in long-term business conditions and 16% increase in short-run business conditions.
"Overall, sentiment climbed for all demographic groups except for lower-income consumers," Hsu said.
Inflation, as measured by the Consumer Price Index, hit a four-decade high of 9.1% per year in June 2022 in the aftermath of the coronavirus pandemic and the trillions of dollars of relief spending that followed.
The Fed responded by raising interest rates aggressively, adding a total of 5% in 10 installments to the prior rate of 0.25%.
Inflation subsequently eased, falling to as low as 3% in the Consumer Price Index reading for July. But that is still well above the Fed’s long-term target of 2%, with officials at the central bank saying they feared renewed spikes if consumers start spending big again.
The Fed is supposed to decide again on interest rates on July 26, with economists saying there was a high probability of the central bank adding another quarter percent to rates.