The University of Michigan and Thomson Reuters report that consumer confidence dropped from 72.9 in December to 71.3 in January. This follows the steep fall in December – after the election and leading up to the tense fiscal cliff negotiations – from 82.7 in November.

Sentiment about both the current and future economy dipped, with the largest decline related to the present environment. The index for present conditions dropped from 87.0 to 84.8; whereas, the forward-looking measure fell from 63.8 to 62.7.

In addition to frustrations related to the political process, consumer reactions to reduced paychecks as a result of the expiration of the payroll tax holiday could partially explain this decrease. The worry would be that lower consumer sentiment could lead to reductions in spending, and to the extent that this is related to less disposable income, that might be expected. So far we have not seen these declines, as retail sales were reported to have increased 0.5 percent in December.

Inflationary expectations in the University of Michigan survey remain modest, but did pick up slightly in December. Consumers expected prices to rise 3.4 percent over the next 12 months, up from 3.3 percent from December and 3.1 percent in November.

Chad Moutray is chief economist, National Association of Manufacturers.

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