WASHINGTON, Sept 14 (Reuters): US consumer sentiment rose to a four-month high in September amid expectations that inflation will continue moderating over the next year and household incomes improve, but views on the labor market weakened against the backdrop of slower job gains.
The brightening inflation outlook was reinforced by other data on Friday showing import prices dropped by the most in eight months in August, driven by a broad decline in the costs of goods. Government data this week showed mild increases in producer and consumer prices in August.
Ebbing price pressures give the Federal Reserve ample room to focus on the labor market, which has slowed considerably from last year's robust job growth. The US central bank is expected to kick off its long-awaited policy easing cycle next Wednesday, with a 25-basis-point interest rate cut almost assured.
"Our guess is that expectations of lower interest rates as well as slowing inflation results are making people feel better about the outlook for the economy," said Carl Weinberg, chief economist at High Frequency Economics.
The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 69.0 this month, the highest level since May, compared to a final reading of 67.9 in August. Economists polled by Reuters had forecast a preliminary reading of 68.5.
Sentiment was lifted by an improvement in buying conditions for long-lasting manufactured goods as consumers perceived prices to be favorable. Consumers' expectations for personal finances and the economy over the next 12 months also improved, but their views of the labor market softened.
The share of consumers expecting the unemployment rate to rise over the next year increased to a 16-month high of 39 per cent from 37 per cent in August. The rise in sentiment was on party lines.
"A growing share of both Republicans and Democrats now anticipate a Harris win," said Surveys of Consumers Director Joanne Hsu. "Consistent with their divergent views of the implications of a Harris presidency for the economy, partisan gaps in sentiment inched up."
The survey was conducted before Tuesday's debate where Republican candidate Donald Trump squared off against Vice President Kamala Harris, the Democratic Party's nominee for the Nov. 5 election.
The survey's reading of one-year inflation expectations fell for the fourth straight month to 2.7 per cent, the lowest reading since December 2020, from 2.8 per cent in August. Its five-year inflation outlook edged up to 3.1 per cent from 3.0 per cent in the prior month.
The elevated long-run inflation expectations, labor market stability and still-warm core inflation readings argue against financial market hopes for a half-per centage-point reduction.
Financial markets saw a roughly 43 per cent probability of a 50 basis points rate cut at the Fed's Sept. 17-18 policy meeting, up from around 15 per cent following the inflation data this week, CME Group's FedWatch Tool showed. The odds of a 25 basis point rate reduction are at about 57 per cent, lowered from 87 per cent during the week.
Stocks on Wall Street were trading higher after former New York Fed President Bill Dudley said there was "a strong case" for a half-point rate reduction. The dollar slipped against a basket of currencies. US Treasury yields fell.
The Fed has maintained its benchmark overnight interest rate in the current 5.25 per cent-5.50 per cent range for more than a year, having raised it by 525 basis points in 2022 and 2023.
Import prices fell 0.3 per cent last month, the largest decline since December 2023, after an unrevised 0.1 per cent gain in July, the Labor Department's Bureau of Labor Statistics said in a separate report. Economists had expected import prices, which exclude tariffs, would fall 0.2 per cent. In the 12 months through August, import prices increased 0.8 per cent after advancing 1.7 per cent in July.
"The inflation flare-up early in the year is no longer evident in the prices of imported goods coming into the country and this is another reason to believe that the balance of risks have shifted for Fed officials back to downside risks for the economy and labor market from the inflation risks earlier this year," said Christopher Rupkey, chief economist at FWDBONDS.
Imported fuels prices fell 3.0 per cent last month, with petroleum products decreasing 3.2 per cent. Prices for fuels increased 1.1 per cent in July. Food prices dipped 0.1 per cent after surging 1.5 per cent in July.
Excluding fuels and food, import prices slipped 0.1 per cent. These so-called core import prices were unchanged in July. Past dollar strength against the currencies of the United States' main trade partners has largely kept imported inflation contained. Core import prices rose 1.1 per cent year-on-year in August.
"It seems likely that non-fuel import prices generally should firm moderately on a forward basis given the lagged nature of the pass-through of dollar moves into import prices, all else equal," said Michael Hanson, an economist at J.P. Morgan.
A line chart titled "Annual change in US import and export prices" that tracks the two metrics over the past 5 years. In August the year-over-year change in the import price index was 0.8 per cent. The change in the export price index was -0.7 per cent.
Prices of imported industrial supplies and materials excluding petroleum fell 0.4 per cent. Imported capital goods prices edged up 0.1 per cent, lifted by nonelectrical machinery. Prices for imported motor vehicles and engines were unchanged after increasing 0.4 per cent in July.
The cost of imported consumer goods, excluding automotives, declined for a third straight month, with nonmanufactured consumer goods dropping 2.0 per cent.
Prices for Chinese imports decreased 0.2 per cent after being unchanged for five straight months. They dropped 1.4 per cent year-on-year in August. The cost of goods imported from Canada declined 1.4 per cent, the most since December 2023.
Prices of goods imported from Mexico fell 0.3 per cent. But prices for goods imported from the European Union rebounded 0.2 per cent after declining 0.4 per cent in July.
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