LDN - Business

US inflation outlook brightening; consumer sentiment near two-year high

[July 15, 2023] By Lucia Mutikani

WASHINGTON (Reuters) - U.S. import prices fell for a second straight month in June as an increase in the cost of fuels was more than offset by declines elsewhere, the latest indication that inflationary pressures in the economy are abating.

With the inflation environment improving considerably, Americans are growing more optimistic about the economic outlook. Consumer sentiment vaulted to the highest level in nearly two years in July, other data showed on Friday.

The disinflationary trend has raised cautious optimism that the economy could avoid a recession this year. Economists also believe an expected interest rate hike from the Federal Reserve later this month would be the last in the U.S. central bank's fastest monetary policy tightening cycle since the 1980s.

The Fed, which has hiked its benchmark overnight interest rate by 500 basis points since March 2022, skipped a rate hike at its policy meeting last month.

"The inflation pipeline is clearing up," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. "Investors should expect the Fed in the upcoming meeting to acknowledge the continued improvement in pricing dynamics across the domestic economy."

Import prices dropped 0.2% last month. Data for May was revised to show import prices declining 0.4% instead of the previously reported 0.6%. Economists polled by Reuters had forecast import prices, which exclude tariffs, would dip 0.1%.

In the 12 months through June, import prices tumbled 6.1%. That was the biggest year-on-year decline since May 2020 and followed a 5.7% drop in May.

Annual import prices have now decreased for five straight months. The government reported this week that consumer and producer prices rose moderately in June.

Though consumer inflation remains above the Fed's 2% target, the pace of increase has slowed sharply since peaking in June 2022, giving consumers some relief.

A separate report from the University of Michigan on Friday showed its consumer sentiment index jumped 12.7% to 72.6 this month, the highest reading since September 2021. Economists had forecast a preliminary reading of 65.5.

Joanne Hsu, the director of the University of Michigan's Surveys of Consumers, attributed the surge in sentiment "to the continued slowdown in inflation along with stability in labor markets."

All demographic groups, with the exception of lower-income consumers, saw an increase in sentiment.

Stocks on Wall Street on Wall Street were trading higher. The dollar was slightly stronger against a basket of currencies. U.S. Treasury prices fell.

INFLATION EXPECTATIONS ANCHORED

Though the survey's inflation expectations increased this month, that was probably because most consumers were interviewed before the release of June's consumer price index report. The cutoff date for the preliminary survey was July 12, the same day that the CPI data was published.

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Shipping containers are seen at a terminal inside the Port of Oakland as truck drivers continue protesting against California's new law known as AB5, in Oakland, California, U.S., July 21, 2022. REUTERS/Carlos Barria

Economists expected inflation expectations could be revised lower when the University of Michigan published its final report at end of the month.

The survey's reading of one-year inflation expectations inched up to 3.4% this month from 3.3% in June. Its five-year inflation outlook nudged up to 3.1% from 3.0% in the prior month, remaining within the narrow 2.9%-3.1% range for 23 of the last 24 months.

"The relative stability of this measure over the last year represents medium-term inflation expectations remaining largely well-anchored, a promising sign for the Fed," said Shannon Seery, an economist at Wells Fargo in New York.

The Labor Department's report showed imported fuel prices rebounded only 0.8% last month while food prices fell 0.3%.

Excluding fuels and food, import prices declined 0.4%. These core import prices were unchanged in May. Core import prices decreased 1.5% on a year-on-year basis in June. They have remained subdued even as the dollar has weakened against the currencies of the United States' main trade partners this year.

"The Fed has gained an ally in its inflation fight despite dollar strength turning to dollar weakness," said Christopher Rupkey, chief economist at FWDBONDS in New York. "Import prices are subtracting from the pernicious trend of the goods inflation Americans have been paying."

Prices for imported capital goods slipped 0.1% in June. The cost of consumer goods excluding motor vehicles dropped 0.3%.

Prices of imported goods from China fell 0.4% for the third straight month, led by a 0.7% decrease in prices for computer and electronic product manufacturing.

Chinese import prices were down 2.3% on a year-on-year basis, the biggest drop since November 2009.

The import price deflation also suggests the economy is slowing. The report also showed export prices fell 0.9% in June after plunging 1.9% in May. Prices for agricultural exports declined 1.6% as lower prices for soybeans, fruit and nuts more than offset higher meat prices.

Nonagricultural export prices fell 0.9%. There were decreases in the cost of nonagricultural industrial supplies and materials as well as food, which canceled out rises in prices for capital goods, consumer goods and motor vehicles.

Export prices plummeted 12.0% on a year-on-year basis in June, the biggest drop since the government started tracking the series in September 1984, after falling 10.2% in May.

(Reporting by Lucia Mutikani; Editing by Christina Fincher and Paul Simao)

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