In September, U.S. consumer sentiment climbed to a four-month high amid expectations that inflation will continue to ease over the next year and household incomes will rise, despite a less optimistic outlook on the labor market due to slower job growth.

 

Supporting the improved inflation outlook, other data on Friday showed that import prices fell in August by the highest margin in eight months, driven by a broad reduction in goods costs. Government data this week indicated moderate increases in producer and consumer prices in August.

 

Falling price pressures give the Federal Reserve ample opportunity to focus on the labor market, which has notably decelerated from last year's strong job growth. The U.S. central bank is anticipated to begin its long-awaited policy easing cycle next Wednesday, with a 25-basis-point interest rate cut almost certain.

 

"Our assumption is that expectations of lower interest rates as well as slowing inflation are making people feel more optimistic about the economic outlook," said Carl Weinberg, chief economist at High Frequency Economics.

 

The University of Michigan's preliminary reading on the overall index of consumer sentiment was 69.0 this month, the highest 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 improved due to better purchasing conditions for long-lasting manufactured goods, as consumers found prices favorable. Consumers' expectations for personal finances and the economy over the next 12 months also brightened, though their perception of the labor market dimmed.

 

The proportion of consumers expecting the unemployment rate to rise over the next year increased to a 16-month high of 39% from 37% in August. The rise in sentiment was split along party lines.

 

"An increasing share of both Republicans and Democrats now anticipate a Harris win," said Surveys of Consumers Director Joanne Hsu. "Reflecting their differing views of the economic implications of a Harris presidency, partisan sentiment gaps slightly widened."

 

The survey was conducted before Tuesday's debate where Republican candidate Donald Trump faced off against Vice President Kamala Harris, the Democratic Party's nominee for the November 5 election.

 

The survey's measure of one-year inflation expectations fell for the fourth consecutive month to 2.7%, the lowest level since December 2020, down from 2.8% in August. Its five-year inflation outlook slightly increased to 3.1% from 3.0% the previous month.

 

The high long-term inflation expectations, stable labor market, and still-strong core inflation figures argue against financial market hopes for a half-percentage-point rate cut.

 

Financial markets estimated around a 43% chance of a 50 basis points rate cut at the Fed's September 17-18 policy meeting, up from approximately 15% following the week's inflation data, according to CME Group's FedWatch Tool. The probability of a 25 basis point rate reduction is around 57%, down from 87% earlier in the week.

 

Wall Street stocks were trading higher after former New York Fed President Bill Dudley commented that there was "a strong case" for a half-point rate cut. The dollar weakened against a basket of currencies, and U.S. Treasury yields fell.