American consumers haven't been this upbeat about the economy since 2021

• The University of Michigan's consumer sentiment gauge surged in January to 78.8, the highest since July 2021.
• Year-ahead inflation expectations softened to 2.9%, hitting the lowest since December 2020.

It's a new year, and Americans are feeling better about the trajectory of the economy.

The University of Michigan's consumer sentiment gauge jumped to 78.8 in January, the highest mark since July 2021. That's up from 69.7 in the prior month, and 64.9 one year ago.

That follows December's surge of more than 8 points, and the two-month increase was the largest since 1991.

The latest boost in confidence comes amid strengthening income expectations as well as an improving inflation outlook. Meanwhile, both Democrats and Republicans expressed more optimism too.

"The improvement was widespread, as consumer views on current economic conditions and expectations for the future both improved notably during the month," said Sam Millette, director of fixed income for Commonwealth Financial Network. "Encouragingly for the Federal Reserve consumer inflation expectations fell in January, with 1-year inflation expectations falling to a 3-year low in January."

The University of Michigan said year-ahead inflation expectations softened to 2.9%, hitting the lowest since December 2020.

Long-run inflation expectations eased to 2.8%, below the 2.9%-3.0% range seen for 26 of the last 30 months, the survey noted.

In fact, consumer inflation has come down sharply since June 2022, when it hit a four-decade high of 9.1%, though the most recent reading showed prices re-accelerated slightly to 3.4% year over year.

Americans' upbeat attitudes have also kept demand strong, with the Commerce Department saying Wednesday that retail sales increased more than expected in December.

Wall Street has turned broadly optimistic for the year ahead as well. Top firms have turned bullish with more soft-landing calls as well as new records for the stock market.

Still, the bear case remains on the table. Downside risks including a rebound in inflation, geopolitical turmoil, and rising US debt may not have been fully priced into markets, according to some strategists.

"While the economy seems strong based on backward-looking data, it's quite fragile if the consumer pulls back," Sal Naro, the chief investment officer of Coherence Credit Strategies, told Busines Insider previously. "That pullback would result in businesses reducing capital expenditures and employee headcount to limit profit margin deterioration, further exacerbating consumer spending weakness and creating a vicious downwards cycle."