Consumer confidence rose to its highest level since July, with the December reading nearly equal to the 2015 average of 92.9--which was the highest since 2004. Importantly, all of the improvement was in how consumers evaluated current economic conditions. The December gain was largely due to lower inflation, which bolstered real incomes and brightened buying plans for household durables. Indeed, there have been only three surveys in more than the past half century in which a higher proportion mentioned the availability of price discounts for durables. Overall, the data point toward gains of 2.8% in real personal consumption expenditures during 2016.

Just as consumer optimism became dependent on very low inflation, the Fed has begun to take steps to accommodate a higher inflation rate. Since wages are never first to incorporate inflationary adjustments, consumers will make their purchases even more contingent on low prices. Moreover, given the weakness in the global economy and the strong dollar, discounting will continue unabated. As a result, the Fed policies will need to be much stronger to overcome the disinflationary psychology of consumers.