US consumer sentiment hits its lowest level

US consumer sentiment hit its lowest in a year in early September and producer prices were flat in August, signalling moderate economic growth and tame inflation that could weigh on the Federal Reserve's decision whether to hike interest rates next week.

The slump in consumer sentiment and persistently weak inflation reported on Friday are in stark contrast with a tightening labour market. Sentiment was likely undermined by recent stock market volatility amid worries over China's slowing economy, while a strong dollar is dampening price pressures.

"The sharp deterioration in consumer confidence and the re-emergence of the disinflationary thrust in goods prices will factor prominently in the Fed's deliberations next week, and both are likely to add to the case for caution as they consider raising rates," said Millan Mulraine, deputy chief economist at TD Securities in New York. The University of Michigan said its consumer sentiment index fell to 85.7 early this month, the lowest since September last year, from a reading of 91.9 in August.

The survey's gauge of consumer expectations also dropped to a one-year low, as households expected slower growth overseas to hit the US economy. Consumers' expectations for current and future personal finances also took a knock. But even as households took a dim view of the economy's outlook, there were only mild declines in sentiment towards motor vehicle and home purchases.

"We look to the final September survey results for any evidence of significant pass-through from weaker sentiment to actual purchasing activity, but expect robust income and job growth to outweigh these factors in actual consumption data," said Jesse Hurwitz, an economist at Barclays in New York.

In a separate report, the Labor Department said its producer price index was unchanged in August after gaining 0.2 per cent in July. The drag on producer prices from lower crude oil prices and a buoyant dollar was offset by an increase in margins for apparel, footwear and accessories retailing.

In the 12 months through August, the PPI fell 0.8 per cent after a similar decline in July. It was the seventh straight 12-month decrease in the index.