Consumer confidence in January is the highest it has been in two years, which is good news for the economy as the Federal Reserve works to bring down inflation and avoid a recession.

The Conference Board’s consumer confidence index rose to 114.8 in January, up from a revised 108 from the month before, the group announced on Tuesday. That is the highest consumer confidence reading since December 2021.

The expectations index, which tracks the short-term outlook of consumers for business, income, and labor market conditions, increased to 83.8 this month from 81.9 in December.

Of interest, the expectations index is now above 80 for two months in a row. Readings below 80 typically signal a recession is likely within the coming year, according to the Conference Board. Consumers’ perceived likelihood of a recession continued to fall as well.

“January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, the chief economist at the Conference Board.

The gain in consumer confidence was observed across all age groups in the survey, although the biggest increase was among consumers over the age of 55. Consumer confidence also improved among all income groups other than those earning over $125,000 annually, which saw a mild dip.

“January’s write-in responses revealed that consumers remain concerned about rising prices although inflation expectations fell to a three-year low,” Peterson said. “Buying plans dipped in January, but consumers continued to rate their income and personal finances favorably currently and over the next six months.”

Inflation, which in 2022 hit the highest level in decades, has been the biggest economic concern for voters since it began trending up in early 2021. Annual inflation peaked at about 9%, which means that, at the time, prices were about 9% higher than they were the year before.

The consumer price index indicated that inflation ticked up to 3.4% for the year ending in December 2023, although, on balance, inflation has been meaningfully falling for months now as the Fed raised interest rates to levels not seen before the Great Recession. It continues to run above the preferred 2% level, but the declines show it is moving in a positive direction.

The Federal Reserve has kept interest rates at 5.25% to 5.50% since July as it assesses the rate hikes’ effects not only on inflation but the labor market. Fed officials have indicated they will begin cutting rates this year, although the timing on that is a moving target.

The central bank is meeting this week and is widely expected to once again hold interest rates steady. Investors had been anticipating that the first rate cut would come as soon as March, although now they see a higher probability that the pivot will begin in May, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Federal Reserve.

While inflation has fallen to more manageable levels, perceptions about the state of the economy and prices have caused trouble for President Joe Biden, who continues to get low marks on the economy heading into a crucial election year.

But crucially, despite the still-too-high inflation, the labor market has remained above water, with employment growth now being notched for 36 consecutive months. The economy added another 216,000 jobs in December, and the unemployment rate was at a healthy 3.7% level.

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Gross domestic product, a broad measure of economic expansion and a key indicator for recessions, has also remained surprisingly buoyant despite the barrage of interest rate hikes.

GDP grew at a 3.3% annual rate in the fourth quarter of 2023, adjusted for inflation, bringing growth for the year to 2.5% in 2023.