By Lucia Mutikani

WASHINGTON (Reuters) -U.S. consumer confidence dropped by the most in three years in September amid mounting fears over the labor market, though more households planned to buy a home over the next six months.

The Conference Board survey on Tuesday also showed consumers expected inflation to increase in the coming year, clouding their views of the economy ahead of the Nov. 5 presidential election. The economy could determine the outcome of the vote.

Still, consumers remained interested in traveling and dining out as well as going out to movies. That could help to underpin consumer spending and the economic expansion.

The Federal Reserve last week cut interest rates by 50 basis points to the 4.75%-5.00% range, the first reduction in borrowing costs since 2020, which Fed Chair Jerome Powell said was meant to demonstrate policymakers' commitment to sustaining a low unemployment rate. The jobless rate is currently at 4.2%.

"The plunge in consumer confidence underscores the growing pressure on many households as the labor market weakens," said Ben Ayers, senior economist at Nationwide. "If the Fed follows through with a relatively aggressive easing cycle over the next year, that could shore up consumers' optimism in the state of the economy and keep the economy from a hard landing."

The Conference Board's consumer confidence index dropped to 98.7 this month from an upwardly revised 105.6 in August. The decline was the largest since August 2021. Economists polled by Reuters had forecast the index rising to 104.0 from the previously reported 103.3.

The cut-off date for the survey was Sept. 17, before the U.S. central bank kicked off its easing cycle.

The biggest drop in confidence was among the 35 to 54 years age group. Confidence fell across most income groups, with consumers earning less than $50,000 a year experiencing the biggest decrease. The Conference Board said write-in responses about politics, including the November elections, remained below both 2020 and 2016 levels.

"The deterioration across the index's main components likely reflected consumers' concerns about the labor market and reactions to fewer hours, slower payroll increases, fewer job openings, even if the labor market remains quite healthy, with low unemployment, few layoffs and elevated wages," said Dana Peterson, chief economist at the Conference Board.

Stocks on Wall Street inched higher. The dollar fell against a basket of currencies. U.S. Treasury yields rose.

BUYING PLANS MIXED

The share of consumers who viewed jobs as being "plentiful" dropped to 30.9%, the lowest since March 2021, from 32.7% in August. Some 18.3% of consumers said jobs were "hard to get," up from 16.8% last month.

The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, fell to 12.6. That was the narrowest since March 2021 and was down from 15.9 in August.

This measure correlates to the unemployment rate in the Labor Department's monthly employment report.

Economists said at first blush the shrinking labor market differential would imply the jobless rate rising to 5%, but noted that monthly moves can be noisy.

"The persistent drop in this measure is a clear sign that the labor market is not nearly as tight as it once was," said Shannon Grein, an economist at Well Fargo. "That said, we're hesitant to put too much weight on this data given broader confidence measures have remained depressed this cycle despite resilient spending habits of households."

The unemployment rate slipped in August after rising for four straight months. It has increased from 3.4% in April 2023.

The rise in the unemployment rate has been driven by an increase in labor supply, mostly from immigration. Layoffs remain at historically low levels.

Consumers' assessments of their financial situation, both now and over the next six months weakened. Plans to buy big-ticket appliances were mixed, with a slight increase in the share of consumers intending to purchase motor vehicles, refrigerators and clothes dryers over the next six months.

But the share of those planning to buy television sets and washing machines declined. A new question about services in this month's survey showed strong intentions to spend on healthcare and utilities over the next six months.

Consumers' 12-month inflation expectations increased to 5.2% from 5.0% in August, though more mentioned lower inflation in their write-in responses.

"If inflation expectations continue to rise and the labor market continues to soften, the Fed is going to have a difficult time appropriately recalibrating monetary policy," said Conrad DeQuadros, a senior economic advisor at Brean Capital.

The Fed raised the policy rate by 525 basis points in 2022 and 2023. It is expected to lower borrowing costs again in November and December.

The share of consumers planning to buy a house over the next six months jumped to 5.7%, the highest level since August 2023, from 4.8% in August. That coincides with a decline in mortgage rates to more than 1-1/2-year lows as well as a moderation in house price inflation. Home price appreciation has cooled as a surge in mortgage rates during the spring pushed buyers to the sidelines, resulting in a rise in housing supply.

A separate report from the Federal Housing Finance Agency on Tuesday showed single-family house prices gained 0.1% on a month-on-month basis after being unchanged in June. They increased 4.5% in the 12 months through July, the smallest rise since June 2023, after advancing 5.3% in June.

"Lower mortgage rates should boost demand, however, preventing a significant softening in prices," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.