Lucia Mutikani
WASHINGTON (Reuters) – U.S. import prices fell for the first time in five months in May on lower energy product prices, providing a further boost to the domestic inflation outlook.
An unexpectedly mild report from the Labor Department on Friday, coupled with data this week showing inflation was tepid last month, keeps a September interest rate cut by the Federal Reserve a possibility.
But signs that inflation is subsiding have not lifted Americans’ spirits, with a survey on Friday showing consumer sentiment slumping to a seven-month low in June.The U.S. central bank on Wednesday delayed the start of interest rate cuts until probably December, and policymakers now expect to cut rates by just 0.25 percentage points this year.
“Fed officials didn’t get the inflation reading they’d hoped for when they met earlier this week, but winds of change are starting to blow in their pessimistic inflation outlook,” said Christopher Rupkey, chief economist at FWDBONDS.
“We would not rule out a first interest rate cut in September. Lower import prices would undoubtedly be welcomed by inflation-weary consumers.”
Import prices fell 0.4 percent last month after rising an unrevised 0.9 percent in April, according to the Labor Department’s Bureau of Labor Statistics, the first decline in import prices since December. Economists surveyed by Reuters had expected import prices, excluding tariffs, to rise 0.1 percent.
In the 12 months to May, import prices rose 1.1 percent, matching the rate of increase in April. Imported fuel prices fell 2.0 percent in May after rising 4.1 percent in April. Crude oil and gasoline prices fell sharply.
Prices of imported food products fell 1.6% after rising 1.3% in April. Prices of imported capital goods fell 0.1% last month, reversing a 0.1% increase in April. Prices of motor vehicles, parts and engines fell 0.1% after rising 0.4% in April.
Prices of imported consumer goods fell 0.2%, marking the third consecutive month of declines.
Excluding fuel and food, import prices fell 0.2%. So-called core import prices rose 0.6% in April. The sharp increase in core import prices occurred despite the dollar’s rise against the currencies of the U.S.’s major trading partners this year.
Core import prices rose 0.1% in May from the same month a year earlier.
The dollar strengthened against a basket of currencies. Treasury prices rose, but stocks fell as investors locked in profits from recent gains.
The Fed on Wednesday left its benchmark overnight interest rate unchanged at its current range of 5.25% to 5.50%, where it has been since July of last year. Economists and financial markets are optimistic that the Fed will begin an easing cycle in September, lowering borrowing costs for a second time. The Fed has raised interest rates by 525 basis points since March 2022.
Controlling inflation
Big retailers including Target have made steep cuts on staples from food to diapers, and inflationary pressures have subsided as prices for gasoline and other goods have fallen, but consumer moods have not brightened so far.
Rising stock prices are also dampening morale. The University of Michigan said its preliminary consumer confidence index came in at 65.6 in June, down from May’s final reading of 69.1 and the lowest since November. It was the third consecutive month of decline.
Sentiments worsened across party lines, but Democrats generally remained more optimistic than Republicans and independents.
Economists, who had expected a preliminary reading of 72.0, blamed the University of Michigan’s shift from telephone surveys to web-based interviews in part for the continued decline in business confidence.
Consumers are less optimistic about their personal financial situations, and concerns about rising prices remain at the forefront.
Taken at face value, the continued deterioration in sentiment suggests weakening consumer spending.
But the correlation between the two is weak. The University of Michigan noted this month that consumers “perceive little change in the economy since May.” The survey’s one-year inflation expectations remained unchanged at 3.3%. The five-year inflation outlook rose to 3.1% from 3.0% in May.
“A sustained decline in gasoline prices should ease consumers’ near-term inflation expectations later this month and into July,” said Oren Krachikin, financial markets economist at Nationwide. “The rise in longer-term (inflation) expectations is a reminder of the challenges posed by high prices and why the Fed needs to sustainably drive inflation down to (its) 2% target.”