U.S. Import Prices Decline in May, Boosting Inflation Outlook Amid Falling Consumer Sentiment

Despite signs of easing inflation, consumer sentiment has declined. A survey on Friday revealed that consumer confidence hit a seven-month low in June.

U.S. import prices decreased for the first time in five months in May, largely due to lower energy product prices, offering a positive sign for the domestic inflation outlook.

This surprising report from the Labor Department, along with recent data showing controlled inflation, suggests the Federal Reserve may consider a September interest rate cut.

Despite signs of easing inflation, consumer sentiment has declined. A survey on Friday revealed that consumer confidence hit a seven-month low in June.

The Federal Reserve, on Wednesday, hinted that rate cuts might not begin until December, forecasting only one quarter-percentage-point reduction 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.”

According to the Bureau of Labor Statistics, import prices fell 0.4% in May after a 0.9% rise in April, marking the first drop since December.

Economists had anticipated a slight increase of 0.1%. Over the past year, import prices rose by 1.1%, consistent with April’s growth.

In May, imported fuel prices decreased by 2.0%, following a 4.1% rise in April, with significant declines in crude petroleum and natural gas prices.

Imported food prices fell by 1.6% after a 1.3% increase in April. Prices for imported capital goods decreased by 0.1%, reversing April’s gain.

The cost of motor vehicles, parts, and engines also dipped by 0.1% after a 0.4% increase in April.

Prices of imported consumer goods dropped by 0.2%, continuing a three-month decline.

Excluding fuels and food, import prices fell by 0.2%, after a 0.6% rise in April. Core import prices rose by 0.1% year-on-year in May.

The dollar strengthened against other currencies, U.S. Treasury prices increased, and stocks slipped as investors took profits from a recent rally.

The Federal Reserve maintained its interest rate range at 5.25%-5.50%, where it has been since July last year.

Economists and markets are hopeful that the Fed will begin easing rates in September, potentially lowering borrowing costs twice this year.

Despite lower prices for essentials, consumer sentiment continues to decline. The University of Michigan reported a drop in its consumer sentiment index to 65.6 in June from 69.1 in May, marking the third consecutive monthly decline.

Sentiment fell across all political affiliations, although Democrats remained generally more optimistic.

Economists partially attributed the sentiment decline to the University of Michigan’s transition to web-based interviews.

Consumers are increasingly concerned about high prices, affecting their outlook on personal finances. Despite deteriorating sentiment, its impact on consumer spending remains uncertain.

The University of Michigan noted that consumers perceive minimal changes in the economy from May.

The survey’s one-year inflation expectation stayed at 3.3%, while the five-year 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 Oren Klachkin, a 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.”