Americans are starting 2026 in a surprisingly good mood. Consumer sentiment just hit its highest level in five months, and inflation worries have retreated to levels not seen in a year. The reason? Grocery prices are finally coming down in meaningful ways.
The University of Michigan released its revised consumer sentiment index for January on Friday, and the number came in at 56.4. That's comfortably above the preliminary reading of 54.0 and December's 52.9 figure. It marks the second straight monthly increase and the strongest 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.
The caveat? Overall sentiment still sits more than 20% below where it was a year ago. Progress, but gradual progress.
Inflation Expectations Cool Down
The real story here is what's happening with inflation expectations. Year-ahead inflation projections dropped to 4.0%, down from 4.3% last month and marking the lowest reading since January 2025. Longer-term expectations ticked up slightly to 3.3% from December's 3.2%, but that remains within a range that policymakers can work with.
What's driving the shift? Food prices, which have been a major pain point for households over the past two years, are now moving in the other direction.
According to Bank of America economist Sara Senatore, deflation gained traction across major agricultural commodities in the fourth quarter of 2025. Sugar prices fell 16.6% year over year. Oil declined 11.1%. Wheat dropped 10.9%. Cheese slid 7.5%. Even milk, which had been relatively stable, saw a 1.9% year-over-year deflation.
The most dramatic moves happened in proteins. Retail egg prices plunged 26% in January after peaking at a staggering 108% year-over-year inflation rate back in March 2025. Chicken breast prices declined 21%, and wing prices collapsed 48% year over year.
This matters a lot for restaurant chains. Bank of America notes that animal proteins like beef and chicken represent 25% to 35% of cost of goods sold for most restaurant operators. Chains like Texas Roadhouse Inc. (TXRH), McDonald's Corp. (MCD), and Cracker Barrel Old Country Store Inc. (CBRL) are likely to see margin relief later this year if these deflationary trends continue.
The Economy Keeps Growing Without Overheating
Broader economic indicators continue to show strength without the kind of overheating that would force the Federal Reserve's hand on interest rates.
On Thursday, the Bureau of Economic Analysis revised third-quarter GDP growth upward from 4.3% to 4.4%. The Atlanta Fed's GDPNow model is even more optimistic, projecting a 5.4% expansion for the fourth quarter.
What's remarkable is that this economic strength hasn't reignited inflation. The personal consumption expenditures price index rose 2.8% year over year in November. Core PCE, which strips out volatile food and energy prices and serves as the Federal Reserve's preferred gauge, also came in at 2.8%. Both matched expectations.
Flash Purchasing Managers' Index data from S&P Global showed the U.S. private sector expanding in January, with the composite index at 52.8. Any reading above 50 signals growth. The services PMI held steady at 52.5, while manufacturing signaled expansion for the sixth consecutive 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.
The picture emerging is one of an economy that's growing solidly but not so fast that it risks rekindling inflation pressures. Combined with easing food prices and improving consumer sentiment, it's about as good a setup as policymakers could hope for heading into the new year.
