By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer sentiment deteriorated in October, with households expecting higher inflation over the next year, but labor market strength was likely to continue supporting consumer spending.
The third straight monthly decline in sentiment reported by the University of Michigan on Friday was nearly across all demographic groups. Consumers’ 12-month inflation expectations increased to a five-month high.
“While consumers continue to spend, confidence measures are signaling caution, even as job growth remains positive and incomes are rising as price pressures gradually ease,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains New York.
The University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 63.0 this month compared to 68.1 in September. Economists polled by Reuters had forecast a preliminary reading of 67.2.
The survey’s reading of one-year inflation expectations increased to 3.8% this month from 3.2% in September. This was the highest reading since May 2023 and remained well above the 2.3-3.0% range seen in the two years prior to the pandemic.
The five-year inflation outlook rose to 3.0% from 2.8% in the prior month, staying within the narrow 2.9-3.1% range for 25 of the last 27 months.
“This is not the stuff that the Federal Reserve wants to see,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.
But the news on inflation was not all downbeat. A separate report from the Labor Department on Friday showed import prices increased less than expected in September as a strong dollar depressed prices of non-petroleum products, which over time will help to lower domestic inflation.
Import prices edged up 0.1% last month after climbing 0.6% in August. Economists had forecast import prices, which exclude tariffs, would gain 0.5%.
“The stronger U.S. dollar on the back of higher bond yields may be in danger of pricing American exports out of world markets, but it is doing one good thing, which is tamping down the prices of imported goods coming into the country and aiding the Fed’s inflation fight,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
U.S. stocks were trading higher. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.
IMPORT PRICES COOLER
Prices for imported fuel rose 4.4 after fuel prices advanced 8.8% in August. Imported food prices dropped 1.3%. Excluding petroleum, import prices decreased 0.3%.
In the 12 months through September, import prices dropped 1.7% after falling 2.9% in August. Annual import prices have now declined for eight straight months.
While data this week showed producer and consumer prices rising more than expected in September, underlying inflation remained moderate. That trend, together with a rise in U.S. Treasury yields and conflict in the Middle East, is expected to discourage the Federal Reserve from raising interest rates next month.
Excluding fuels and food, import prices slipped 0.1% after dropping 0.3% in August. These so-called core import prices decreased 1.1% on a year-on-year basis in September.
The dollar’s strength against the currencies of the United States’ main trading partners is dampening imported prices. The dollar has gained about 1.95% on a trade-weighted basis so far this year.
The cost of imported capital goods fell 0.1% for a second straight month in September. Prices for imported motor vehicles, parts and engines also dipped 0.1%, while those of consumer goods excluding automotives were unchanged.
“Declining import prices for consumer goods and auto parts should minimize the risk of a resurgence in consumer inflation,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.
The cost of goods imported from China dropped 0.3% after being unchanged in the previous month.
They fell 2.6% on a year-on-year basis in September, the largest decline since October 2009. Prices of goods imported from Canada increased 0.8%, but declined 6.7% on a year-on-year basis. Mexican goods import prices rose 3.7% year-on-year.
The report also showed export prices rose 0.7% last month after advancing 1.1% in August. They were lifted by higher prices for nonagricultural exports, which rose 1.0% amid increases in the prices of industrial supplies and materials, motor vehicles and capital goods. Agricultural export prices fell 1.1%, pulled down by soybeans, corn, wheat and meat.
Export prices decreased 4.1% on a year-on-year basis in September after dropping 5.7% in August. They have now declined for eight consecutive months.
(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)