US imported inflation subdued; consumer sentiment slides to seven-month low

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. import prices fell for the first time in five months in May amid lower prices for energy products, providing another boost to the domestic inflation outlook.

The unexpectedly benign report from the Labor Department on Friday combined with data this week showing tame inflation readings last month to keep a September interest rate cut from the Federal Reserve on the table.

Signs that inflation is subsiding have, however, failed to lift spirits among Americans, with a survey on Friday showing consumer sentiment dropping to a seven-month low in June. The U.S. central bank on Wednesday pushed out the start of rate cuts to perhaps as late as December, with policymakers projecting only a single quarter-percentage-point reduction for this year.

"Fed officials did not see what they were hoping for in the inflation trend when they met earlier this week, but the winds of change are coming for those bearish inflation outlooks," said Christopher Rupkey, chief economist at FWDBONDS.

"We would not rule out a first rate cut in September. The decline in imported goods prices will surely be welcomed by inflation-weary consumers."

Import prices dropped 0.4% last month after an unrevised 0.9% surge in April, the Labor Department's Bureau of Labor Statistics said. That was the first decline in import prices since December. Economists polled by Reuters had expected import prices, which exclude tariffs, to edge up 0.1%.

In the 12 months through May, import prices increased 1.1%, matching April's rise. Imported fuel prices dropped 2.0% in May after advancing 4.1% in April. There were sharp decreases in the prices of crude petroleum and natural gas.

The cost of imported food plunged 1.6% after rising 1.3% in April. Prices for imported capital goods fell 0.1% last month, reversing April's 0.1% gain. The cost of motor vehicles, parts and engines dipped 0.1% after rising 0.4% in April.

Imported consumer goods prices fell 0.2%, declining for a third straight month.

Excluding fuels and food, import prices fell 0.2%. These so-called core import prices jumped 0.6% in April. They had popped up despite the dollar strengthening against the currencies of the United States' main trade partners this year.

Core import prices gained 0.1% year-on-year in May.

The dollar was trading higher against a basket of currencies. U.S. Treasury prices rose, while stocks slipped as investors booked profits from a recent rally.

The Fed on Wednesday kept its benchmark overnight interest rate in the current 5.25%-5.50% range, where it has been since last July. Economists and financial markets remain optimistic that the Fed will start its easing cycle in September and lower borrowing costs twice. The Fed has raised its policy rate by 525 basis points since March 2022.

INFLATION COOLING

Retreating inflation pressures amid lower prices for gasoline and other goods as major retailers, including Target, slash prices on essentials ranging from food to diapers, are so far not brightening moods among consumers.

The stock market rally has not helped morale either. The University of Michigan said its preliminary reading on the overall index of consumer sentiment came in at 65.6 in June, the lowest level since November, compared to a final reading of 69.1 in May. It was the third straight monthly decline.

Sentiment soured across political party affiliation, though Democrats in general remained more upbeat compared to Republicans and Independents.

Economists, who had forecast a preliminary reading of 72.0, attributed the University of Michigan's ongoing transition to web-based interviews from telephone surveys for part of the continued decline in sentiment.

Consumers were less upbeat about their personal finances, with worries about high prices staying in the forefront.

At face value, the continued deterioration in sentiment would suggest softer consumer spending.

The correlation between the two is, however, weak. The University of Michigan noted that consumers this month "perceive few changes in the economy from May." The survey's reading of one-year inflation expectations was unchanged at 3.3%. Its five-year inflation outlook rose to 3.1% from 3.0% in May.

"Falling gasoline prices, if sustained, should temper consumers' short-term inflation expectations later this month and in July," said Nationwide financial market economist, Oren Klachkin, financial market economist at Nationwide. "The uptick in longer-term (inflation) expectations ... is a reminder of the challenges that high prices pose and why the Fed needs to bring inflation sustainably down to (its) two percent goal."

(Reporting By Lucia Mutikani; editing by Tomasz Janowski and Andrea Ricci)