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US consumer sentiment slips; inflation expectations increase

busFILE PHOTO: Grocery store in Washington

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer sentiment receded in April and households expected inflation to increase over the next 12 months and beyond, likely providing more ammunition for the Federal Reserve to delay cutting interest rates until September.

The survey from the University of Michigan on Friday followed data this week that showed consumer prices increased more than expected for a third straight month in March.

Stubbornly high inflation and a strong labor market prompted financial markets and most economists to sharply dial back their expectations for the first rate cut from the U.S. central bank to September from June. They also have lowered the number of anticipated rate cuts to two from three.

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But inflation is not spiraling out of control, with producer prices increasing moderately last month. That was reinforced by other data on Friday showing import prices excluding fuels barely rose in March after surging at the start of the year.

"This increase in inflation expectations is not what the Fed wants to see, but despite the increase, they remain in line with the recent trend and are well-anchored," said Eugenio Aleman, chief economist at Raymond James.

The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 77.9 this month, compared to a final reading of 79.4 in March.

Since January, the sentiment index has remained within a narrow range 2.5 points, well under the 5 points which the University of Michigan said was necessary for a statistically significant difference. Economists polled by Reuters had forecast a preliminary reading of 79.0.

The dip in sentiment likely reflected higher gasoline prices and occurred despite a rally on the stock market. Democrats were more upbeat this month than Republicans and independents.

"Overall, consumers are reserving judgment about the economy in light of the upcoming election, which, in the view of many consumers, could have a substantial impact on the trajectory of the economy," said Joanne Hsu, the director of the University of Michigan's Surveys of Consumers.

The survey's reading of one-year inflation expectations increased to 3.1% in April from 2.9% in March, rising just above the 2.3%-3.0% range seen in the two years before the COVID-19 pandemic. The survey's five-year inflation outlook rose to a five-month high of 3.0% from 2.8% in the prior month.

Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

IMPORT PRICES INCREASE

A report from the Labor Department's Bureau of Labor Statistics showed import prices rose 0.4% in March after an unrevised 0.3% gain in February. Economists had expected import prices, which exclude tariffs, to rise 0.3%.

In the 12 months through March, import prices rebounded 0.4%. That was the first year-on-year increase since January 2023, and followed a 0.9% decline in February.

Imported fuel prices increased 4.7% in March after rising 1.3% in February. Petroleum prices surged 6.0%, but natural gas prices tumbled 31.9%. The cost of imported food shot up 1.6% after climbing 0.3% in the prior month.

Excluding fuels and food, import prices were unchanged. These so-called core import prices edged up 0.1% in February. Core import prices fell 0.4% on a year-on-year basis in March.

Import prices excluding fuels edged up 0.1% after rising 0.2% in the prior month. They were unchanged on a year-on-year basis.

"Fed officials cannot lower their guard and rate cuts this year may not be as numerous as earlier forecasts had projected," said Christopher Rupkey, chief economist at FWDBONDS. "But at least the slower increase in import prices is good news, adding to the producer prices report yesterday, that inflation pressures may not be raging completely out of control."

Boston Fed President Susan Collins told Reuters on Friday that she is eyeing a couple of rate cuts this year. The U.S. central bank has raised its benchmark overnight interest rate by 525 basis points since March of 2022 to the current 5.25%-5.50% range, where it has been since July.

Prices for imported capital goods dropped 0.3% last month, potentially pointing to a moderation in business investment. The cost of motor vehicles, parts and engines rose 0.2%. Imported consumer goods prices excluding automotives fell 0.3%.

The cost of imported goods from China slipped 0.1% for the second consecutive month. They dropped 2.6% on a year-on-year basis in March. But prices of goods imported from Canada and Mexico increased solidly.

"With market rate-cut expectations declining in recent weeks, the dollar has rallied and bucked previous expectations for a gradual weakening," said Matthew Martin, a U.S. economist at Oxford Economics.

"The benefit, from an importer's perspective, is that a stronger dollar makes imports relatively cheaper and would support lower import price inflation in the months ahead."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao)