© Reuters. FILE PHOTO: Vegetables are pictured at a produce shop at Reading Terminal Market after the inflation rate hit a 40-year high in January, in Philadelphia, Pennsylvania, U.S. February 19, 2022. REUTERS/Hannah Beier/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer sentiment deteriorated in October, with households expecting higher inflation over the next year, but labor market strength was likely to continue supporting consumer spending.

The third straight monthly decline in sentiment reported by the University of Michigan on Friday was across nearly all demographic groups and likely reflected a rise in gasoline prices, which has since reversed. Consumers’ 12-month inflation expectations increased to a five-month high.

Sentiment was also likely hurt by violence in the Middle East, with the cutoff date for the survey Oct. 11, days after Palestinian Islamist group Hamas launched its attack on Israel. Other factors that could have weighed on morale include the continuing strike in the automobile industry and political dysfunction in Washington.

“There were a lot of reasons sentiment could have fallen, given different geopolitical events and the macro picture being highly uncertain, but the movements in sentiment are pretty volatile and don’t necessarily move in line with broader spending,” said Shannon Seery, an economist at Wells Fargo in Charlotte, North Carolina. “Our forecast for spending is a continued slowdown rather than a collapse.”

The University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 63.0 this month compared with 68.1 in September. Economists polled by Reuters had forecast a preliminary reading of 67.2.

So far there has not been a strong correlation between sentiment and consumer spending, which continues to be driven by higher wages from a tight labor market. Consumers still have excess savings accumulated during the COVID-19 pandemic. The economy created 336,000 jobs in September.

The survey’s reading of one-year inflation expectations increased to 3.8% this month from 3.2% in September. This was the highest reading since May 2023 and remained well above the 2.3% to 3.0% range seen in the two years before the pandemic.

The five-year inflation outlook rose to 3.0% from 2.8% in the prior month, staying within the narrow 2.9% to 3.1% range for 25 of the last 27 months. Federal Reserve officials are closely watching inflation expectations as they contemplate the future course of monetary policy.

Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range.

Stocks on Wall Street gave up some gains on the inflation expectations data. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

IMPORT DEFLATION

But the news on inflation was not all downbeat.

A separate report from the Labor Department showed import prices barely rising in September as a strong dollar depressed prices of non-petroleum products, which over time will help to lower domestic inflation.

Import prices edged up 0.1% last month after climbing 0.6% in August. Economists had forecast import prices, which exclude tariffs, would gain 0.5%.

“The stronger U.S. dollar on the back of higher bond yields may be in danger of pricing American exports out of world markets, but it is doing one good thing, which is tamping down the prices of imported goods coming into the country and aiding the Fed’s inflation fight,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Prices for imported fuel rose 4.4% after advancing 8.8% in August. Imported food prices dropped 1.3%. Excluding petroleum, import prices decreased 0.3%.

In the 12 months through September, import prices dropped 1.7% after falling 2.9% in August. Annual import prices have now declined for eight straight months.

While data this week showed producer and consumer prices rising more than expected in September, underlying inflation remained moderate. That trend, together with a rise in U.S. Treasury yields is expected to discourage the Fed from raising interest rates next month.

Excluding fuels and food, import prices slipped 0.1% after dropping 0.3% in August. These so-called core import prices decreased 1.1% on a year-on-year basis in September, reflecting the dollar’s strength against the currencies of the United States’ main trading partners.

The dollar has gained about 1.95% on a trade-weighted basis so far this year. The cost of imported capital goods fell 0.1% for a second straight month in September.

Prices for imported motor vehicles, parts and engines also dipped 0.1%, while those of consumer goods excluding automobiles were unchanged. The cost of goods imported from China dropped 0.3% after being unchanged in the previous month.

They fell 2.6% on a year-on-year basis in September, the largest decline since October 2009. Prices of goods imported from Canada increased 0.8%, but declined 6.7% on a year-on-year basis. Mexican goods import prices rose 3.7% year-on-year.

“Declining import prices for consumer goods and auto parts should minimize the risk of a resurgence in consumer inflation,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:) in Charlotte, North Carolina.