By Lucia Mutikani
WASHINGTON (Reuters) -U.S. consumers' near-term inflation expectations dropped to more than a two-year low in June and the outlook over the next five years improved slightly, according to a survey on Friday that also showed sentiment perking up.
The University of Michigan's survey followed data this week showing annual consumer and producer prices retreating sharply in May, largely thanks to declining energy costs. The Fed on Wednesday left its policy rate unchanged, but signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by year end.
"The Fed will be gratified that the surge in inflation expectations in the late-1970s and early 1980s has not been repeated," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
The University of Michigan survey's reading of one-year inflation expectations dropped to 3.3% this month, the lowest since March 2021, from 4.2% in May. Its five-year inflation outlook dipped to 3.0% from 3.1% in May, staying within the narrow 2.9-3.1% range for 22 of the last 23 months.
With inflation subsiding, though still above the Fed's 2% target, financial markets are betting that the central bank will raise interest rates only one more time this year, according to the CMEGroup's Fedwatch tool. The Fed has delivered 500 basis points worth of rate hikes since March 2022, when it embarked on its fastest policy tightening cycle in more than 40 years.
U.S. stocks were trading higher. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
Easing worries about inflation lifted consumers' spirits this month. The survey's preliminary reading on the overall index of consumer sentiment came in at a four-month high of 63.9 in June compared with 59.2 in May. Economists polled by Reuters had forecast a preliminary reading of 60.0.
Sentiment was also boosted by the resolution of a stand-off in Washington over raising the government's borrowing cap.
Though the sentiment index is now 28% above the historic low from a year ago, Surveys of Consumers Director Joanne Hsu noted that "a majority of consumers still expect difficult times in the economy over the next year."
The survey's current conditions index climbed to a reading of 68.0 from 64.9 in May. Its measure of consumer expectations rose to 61.3 from 55.4 last month.
Economists saw the rise in sentiment as supportive of consumer spending in the months ahead. Consumers have remained resilient despite the challenges of higher prices and borrowing costs, thanks to strong wage growth being generated by a tight labor market. Government data on Thursday showed an unexpected increase in retail sales in May.
"Consumers are becoming believers in an economy now marked by strong job growth and lower inflation," said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia.