U.S. consumer sentiment increased to a four-month peak in September amid expectations that inflation will continue to moderate over the next year and household incomes will improve, though views on the labor market weakened against the backdrop of slower job gains.

 

The improving inflation outlook was supported by other data on Friday showing import prices dropped by the most in eight months in August, driven by a widespread decline in the costs of goods. Government data this week showed mild increases in producer and consumer prices in August.

 

Decreasing price pressures provide the Federal Reserve ample room to focus on the labor market, which has notably slowed from last year's robust job growth. The U.S. central bank is expected to begin its long-anticipated policy easing cycle next Wednesday, with a 25-basis-point interest rate cut almost guaranteed.

 

"Our assumption is that expectations of lower interest rates as well as slowing inflation results 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 came in at 69.0 this month, the highest level since May, compared to a final reading of 67.9 in August. Economists surveyed by Reuters had forecast a preliminary reading of 68.5.

 

Sentiment improved due to better 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 brightened, though 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 peak of 39% from 37% in August. The rise in sentiment was on party lines.

 

"An increasing 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 slightly increased."

 

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

 

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

 

The elevated long-term inflation expectations, labor market stability, and still-strong core inflation readings argue against financial market hopes for a half-percentage-point reduction.

 

Financial markets saw a roughly 43% chance of a 50 basis points rate cut at the Fed's September 17-18 policy meeting, up from approximately 15% following the inflation data this week, CME Group's FedWatch Tool showed. The odds of a 25 basis point rate reduction are around 57%, down from 87% 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 weakened against a basket of currencies. U.S. Treasury yields declined.