(Reuters) - U.S. consumers lowered their views of where inflation is headed in July, a closely watched survey showed on Friday, a downshift in expectations that will be welcome news at the Federal Reserve in its battle with the highest inflation rate in four decades.

Consumers responding to this month's University of Michigan Consumer Sentiment Index survey indicated they see inflation in the next year easing to a rate of 5.2% from their previous expectation of 5.3% in June. That is the lowest one-year price increase expectation since February.

More importantly for the Fed, which is raising interest rates to lower demand and bring down inflation to its targeted level of 2% annually, consumers expect inflation to run at 2.9% over a longer, five-year horizon, down from June's highest-in-more-than-a-decade final reading of 3.1%.

While that was not quite the degree of relief as indicated in the survey's preliminary reading for July published two weeks ago of 2.8%, it will be welcomed at the Fed as an indication that expectations for prices spiraling ever higher over the longer term do not appear to be becoming entrenched.

In addition to fighting actual inflation, the Fed is campaigning to manage the psychology around it by signalling its intentions to act forcefully to contain it, which economists believe is a key driver of inflation over the longer term.

Earlier on Friday, the Fed's benchmark measure of inflation used for its 2% target was reported at 6.8% in June, up from 6.3% in May and the highest in 40 years.

Economists and Fed officials have some hope that inflation readings for the current month will ease from those levels as prices for some key consumer staples - gasoline prices in particular - have dropped notably since hitting record highs in June. Pump prices, which are influential in the University of Michigan surveys as well, have fallen more than 15% since mid-June, according to AAA.

(Reporting By Dan Burns; Editing by Chizu Nomiyama)