US consumer sentiment drops in September, but wealthier households stay steady

US consumer sentiment weakened in September, underscoring households’ unease over persistent inflation and a softer labour market outlook.

The University of Michigan’s final Consumer Sentiment Index fell to 55.1 from 58.2 in August, marking a 5.3% monthly decline and a 21.6% drop compared with a year earlier.

The index was revised further down from the preliminary consumer sentiment index of 55.4 released earlier this month.

The Current Conditions Index registered 60.4, down from 61.7 in August, reflecting limited improvement in households’ near-term financial positions.

The Expectations Index slipped to 51.7 from 55.9 a month earlier, pointing to growing concerns about future economic conditions.

Joanne Hsu, director of the Surveys of Consumers, said the downturn was broad-based across age, income, and education groups.

The survey found that frustration with high prices remained a dominant theme, with 44% of respondents mentioning that inflation was eroding their personal finances, the highest in a year.

"Although September’s decline was relatively modest, it was still seen across a broad swath of the population, across groups by age, income, and education, and all five index components," she said.

"A key exception: sentiment for consumers with larger stock holdings held steady in September, while for those with smaller or no holdings, sentiment decreased," she said.

Interviews this month highlight the fact that consumers feel pressure both from the prospect of higher inflation as well as the risk of weaker labour markets, she said.

Inflation pressures persist despite the Fed’s rate cut

The weaker consumer mood coincided with inflation readings that showed little progress toward the Federal Reserve’s 2% target.

The Commerce Department reported Friday that the core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, rose 2.9% in August compared with a year earlier, unchanged from July.

On a monthly basis, core prices rose 0.2%.

The broader PCE index, which includes food and energy, advanced 0.3% in August, lifting the annual pace to 2.7% from 2.6% in July.

Economists said the data were largely expected but emphasised the challenge for policymakers as they weigh sticky inflation against signs of slowing job growth.

Last week, the Fed cut its benchmark interest rate for the first time this year, lowering the federal funds rate by 25 basis points to a range of 4.00 to 4.25 percent.

Chair Jerome Powell described the policy backdrop as “challenging,” with upside risks to inflation but growing downside risks to employment.

Markets weigh mixed signals

Financial markets reacted cautiously to Friday’s inflation readings.

Stock futures edged higher, but gains were restrained by solid labour market data released a day earlier and a sharp upward revision in second-quarter GDP growth to 3.8 percent.

Investors worry that fewer jobless claims and stronger-than-expected growth could give the Fed less room to continue cutting rates.

At the same time, weakening sentiment and uneven household finances suggest risks to consumer spending, which accounts for more than two-thirds of US economic activity.

Economists say the divergence between high-income households benefiting from rising wealth and lower-income families burdened by higher prices is likely to shape the economic outlook heading into year-end.