By Safiyah Riddle

Diminishing inflation pushed consumer sentiment to the highest in nearly two years, a closely watched survey showed on Friday.

The University of Michigan's final index of consumer sentiment came in at 71.6 in July, down slightly from a preliminary reading but up from 64.4 last month and the highest since October 2021. Economists polled by Reuters had forecast the index at 72.6, unchanged from the preliminary reading two weeks ago.

Consumer expectations for inflation over the next year ticked up to 3.4% from 3.3% in June, but at a 5-year horizon they held steady at 3.0% and remained within the narrow range of the past few months.

On Wednesday, the Federal Reserve delivered its 11th interest rate hike since March 2022, raising rates a quarter point to 5.25-5.50%. Fed Chair Jerome Powell left the possibility of future rate hikes open and suggested the economy would need to slow for the central bank to achieve its price-stability target.

The latest data show growth remains healthy, however. Gross domestic product topped analyst predictions in the second quarter at a 2.4% annualized growth rate, and new claims for unemployment benefits fell to the lowest level since January. Meanwhile, the Fed's preferred measure of inflation last month made the smallest annual gain since March 2021 at 3%, a separate report out Friday showed.

The strength of recent data has made the prospect of a "soft-landing" - where inflation falls and a recession is avoided - more realistic.

(Reporting by Safiyah Riddle; Editing by Chizu Nomiyama)