By Lucia Mutikani
WASHINGTON, June 12 (Reuters) - U.S. consumer sentiment bounced off record lows in early June as easing gasoline prices offered households some relief, though concerns about inflation stoked by the Middle East conflict lingered.
Lower-income households led the broad improvement in sentiment reported by the University of Michigan's Surveys of Consumers on Friday. Gasoline prices have dropped from four-year highs over the past three weeks, according to data from motorist advocacy group
AAA, as oil prices stayed below $100 a barrel despite a fragile ceasefire.
Labor market resilience, marked by three consecutive months of above-expectations job growth and a stable unemployment rate, also likely contributed to the increase in the sentiment. But the U.S.-led war against Iran, now in its fourth month, still poses a risk to the economic outlook.
President Donald Trump denied on Friday that the United States had made major concessions to Iran. Trump on Thursday called off new strikes on Iran saying a deal had been reached.
"It looks like gasoline prices peaked around the Memorial Day holiday as often happens each year," said Christopher Rupkey, chief economist at FWDBONDS. "There is still a cost-of-living crisis and goods prices are not going to be coming back down. The economic risks are still out there but at least the outlook is less dire than it was before."
The University of Michigan said its Consumer Sentiment Index increased to 48.9 this month from an all-time low of 44.8 in May. Economists polled by Reuters had forecast the index climbing to 46.0. Sentiment increased across age groups, education and political party affiliation.
The national average retail gasoline price dropped to $4.11 this week from $4.56 on May 21, the highest in four years, AAA data showed. The pain at the pump has disproportionately hurt lower-income households, with higher-income consumers cushioned by a stock market rally, which is boosting their wealth.
"Lower-income consumers exhibited a particularly strong sentiment increase, consistent with the fact that gasoline comprises a larger share of their budgets," said Joanne Hsu, the director of the Surveys of Consumers. "Consumers remain focused on kitchen table issues. They feel burdened by the recent escalation in inflation and worry that higher inflation could remain stubborn going forward, particularly in the short run."
INFLATION EXPECTATIONS MODERATE
The higher cost of living is fueling unhappiness with Trump's handling of the economy, and weighing on his approval rating. Consumer inflation jumped above 4% in May for the first time in three years, the government reported this week.
Stocks on Wall Street traded higher. The dollar slipped against a basket of currencies. U.S. Treasury yields rose.
Easing gasoline prices led to a moderation in consumers' inflation expectations this month, though the conflict will determine the future trajectory.
"We expect inflation pressures to ease after the Iran conflict simmers and the subsequent improvement in supply chains," said Jeffrey Roach, chief economist at LPL Financial. "But if the conflict in Iran remains throughout the summer, we should expect stronger inflation headwinds will put a damper on the growth trajectory."
The survey's measure of consumer expectations for inflation over the next year slipped to a still-high 4.6% this month from 4.8% in May. Consumers' expectations for inflation over the next five years dropped to 3.4% from 3.9% last month.
High inflation has dashed hopes for an interest rate cut from the Federal Reserve this year, with financial markets pricing in monetary policy tightening. Economists believe the bar for a rate hike is high, in the absence of widespread energy-related price increases. The U.S. central bank is expected to keep its benchmark overnight interest rate in the 3.50%-3.75% range next Wednesday, but abandon its easing bias.
Economists said Fed officials were likely to shrug off the drop in inflation expectations, noting that respondents in the University of Michigan Survey anticipated higher borrowing costs over the next year.
"This level of medium-term inflation expectations was seen as a factor in the rapid pace of Fed hikes that began in June 2022 and a 3.4% reading should not be interpreted as a sign that the public is no longer worried about inflation," said John Ryding, chief economic advisor at Brean Capital.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
