AMERICAN consumers’ optimism over future prospects has sunk to its lowest level this year amid mounting anxieties over higher oil and petrol prices, Iraq and the threat of an imminent rise in interest rates.

Despite a series of buoyant figures, consumers’ sentiment over the economic outlook has turned increasingly gloomy, according to a key barometer of confidence.

The influential gauge of optimism from the University of Michigan, released yesterday, showed that Americans’ expectations for future prospects deteriorated in May for a fourth month in succession. The survey’s expectations index fell from 87.3 in April to 85.8 for May, its lowest mark this year. The overall confidence reading for May in the survey was unchanged at 94.2.

However, this was also worse than expected, confounding predictions that strong gains in employment would buoy sentiment.

However, the evidence of jitters over the direction of the world’s biggest economy came as new US inflation figures hardened market expectations that the Federal Reserve could raise rates as soon as June.

The headline rise in US consumer prices was a smaller than expected 0.2 per cent last month. But traders and investors concentrated on the core measure of inflation, which rose by a stronger than expected 0.3 per cent amid price rises for key goods and services.

Although there was some respite from higher petrol prices, which fell 0.3 per cent in April, economists pointed to strong gains in medical and housing costs, while prices for clothing failed to fall back after steep gains in March.

Core US inflation is now running at an annual rate of 1.8 per cent, its highest for more than a year.

“It’s pretty clear that price pressure has picked up. It’s hard to fight the direction. This only reinforces the case for the Fed to move as soon as the next meeting,” Jim Sullivan, of UBS, said.

Analysts said that the case for higher rates was reinforced by an increase in US manufacturing output during April, which rose 0.7 per cent in the biggest gain for three years. The broader-based measure of US industrial production, which includes mining and utilities output, rose by 0.8 per cent, while capacity use in US industry also climbed to its highest since July 2001. Analysts noted that the strength of the manufacturing gains was broad-based, with the only weak sectors being consumer electronics, carmaking and the defence sector.