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Over the past several months, consumers faced mounting concerns about rising prices, trade tensions and the trajectory of interest rates. Yet in June 2025, the University of Michigan’s consumer sentiment index climbed to 60.5, marking a notable improvement from consecutive readings of 52.2 in April and May. This shift signals that households are beginning to breathe easier, buoyed by signs that inflationary pressures are stabilizing even as uncertainty persists.
The rebound in confidence follows an 18.2% decline in sentiment between December 2024 and June 2025. During that stretch, consumers lamented higher grocery bills, volatile energy costs and potential tariffs on imports. Now, with the Personal Consumption Expenditures price index rising just 0.1% in May and annual PCE at 2.3%, many feel the worst of the spike may be behind them.
This renewed optimism stems from a combination of cooler price readings and a broader sense that central banks are striking a balance between supporting growth and keeping inflation in check. Observers note that this is the first sustained lift in sentiment after a series of disappointments, reflecting historic lows in sentiment readings being left in the rearview mirror.
Recent data show core PCE inflation, which excludes food and energy, ticked up to 2.7% year-over-year in May, compared with 2.6% in April. While this slight increase may raise eyebrows, it remains within a range that the Federal Reserve considers acceptable. Indeed, the Fed’s “wait-and-see approach to rates” suggests policymakers will hold fire until they are convinced inflation is sustainably on target.
Meanwhile, in the eurozone, core inflation eased to its lowest level since October 2021, and the European Central Bank is contemplating further rate cuts. The global trend toward moderating price pressures provides an additional psychological boost to consumers, who view this as a broader affirmation that high inflation concerns are abating.
Despite the uptick in confidence, actual spending in May fell by 0.1%, catching many analysts by surprise. Consumers pulled back on goods purchases, likely having front-loaded major buys earlier in the spring prior to tariff hikes. Service sector spending inflation is also cooling, with eurozone services up just 3.2% year-over-year and U.S. services up 3.3%.
Personal income dipped 0.4% in May after a 0.7% surge in April driven by temporary social benefits. The uneven trajectory of earnings and spending underscores a slowdown in income and spending growth, even as confidence climbs. In Q1 2025, real personal consumption expenditures expanded at a 1.2% annualized pace, down sharply from a 4% gain in Q4 2024.
Not all households view the economic landscape the same way. Surveys reveal that older consumers are disproportionately concerned about inflation, with half naming it their primary worry in Q1 2025. Younger generations report greater financial strain, often relying on credit or savings to bridge income shortfalls.
Some segments have benefited from wage gains or lower commuting costs, while others remain vulnerable to rising rents and medical expenses. This heterogeneity highlights the challenge for policymakers striving to maintain aggregate confidence without leaving pockets of the population behind.
Amid these contrasts, many consumers oscillate between hope and caution, reflecting mixed outlook on household finances as they navigate an uneven recovery.
Inflation rates abroad have also peaked, with South Africa’s CPI at 4.6% year-over-year in July and many emerging markets reporting similar trends. These global developments reinforce the view that the recent moderation in price pressures is not isolated, lending credence to forecasts of a gradual return to stable consumer price gains.
Looking ahead, potential catalysts for renewed uncertainty include the future of tariffs and geopolitical tensions that could disrupt supply chains. If new trade barriers emerge, consumers may face fresh price shocks, challenging the current optimism.
Nevertheless, the recent surge in sentiment offers a window of opportunity. Policymakers can harness this goodwill by communicating clearly about future rate decisions and by implementing targeted fiscal measures to support households still grappling with high costs.
For businesses, the lift in consumer confidence suggests a more favorable environment for investment in new products and services. Companies that address affordability concerns while delivering value stand to gain market share as customers regain their appetite for spending.
Ultimately, the interplay between evolving inflation trends and consumer behavior will shape the next phase of the economic cycle. If price pressures remain contained and incomes stabilize, the positive momentum in sentiment could translate into a sustained expansion in spending.
As households across the income spectrum adjust their expectations, the collective mood appears to be shifting from fear of runaway inflation to cautious optimism. That transition underscores the resilience of consumers and the importance of steady policy guidance in maintaining the fragile gains achieved thus far.
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