Mod­est rise in US con­sumer prices may de­lay Fed hike

Kuwait Times - - BUSINESS -

US con­sumer prices rose slightly in July as higher food costs were partly off­set by fall­ing prices for a range of other goods, sug­gest­ing be­nign in­fla­tion that could per­suade a cau­tious Fed­eral Re­serve to de­lay rais­ing in­ter­est rates until De­cem­ber.

But with the la­bor mar­ket near full em­ploy­ment and eco­nomic growth ac­cel­er­at­ing, an­a­lysts ex­pect the US cen­tral bank will an­nounce a plan to start un­wind­ing its mas­sive bond port­fo­lio at its pol­icy meet­ing next month. “We be­lieve the Fed will fo­cus on the bal­ance sheet in Septem­ber, fore­go­ing an­other rate hike until De­cem­ber,” said James Bohnaker, an econ­o­mist at IHS Markit in Lex­ing­ton, Mas­sachusetts. “The in­fla­tion out­look will not change dras­ti­cally any­time soon.”

The La­bor De­part­ment said on Fri­day its Con­sumer Price In­dex edged up 0.1 per­cent last month af­ter be­ing un­changed in June. That lifted the yearon-year in­crease in the CPI to 1.7 per­cent from 1.6 per­cent in June. Econ­o­mists had fore­cast the CPI ris­ing 0.2 per­cent in July and climb­ing 1.8 per­cent year-on-year. Strip­ping out the volatile food and en­ergy com­po­nents, con­sumer prices gained 0.1 per­cent for the fourth straight month. The so-called core CPI rose 1.7 per­cent in the 12 months through July and has now in­creased by that mar­gin for three con­sec­u­tive months.

De­spite the mod­est gain in con­sumer prices, which came on the heels of a drop in pro­ducer prices in July, many econ­o­mists con­tinue to share the Fed’s con­vic­tion that tran­si­tory fac­tors were hold­ing back in­fla­tion. Fed Chair Janet Yellen told law­mak­ers last month that “some spe­cial fac­tors,” in­clud­ing prices for mo­bile phone plans and pre­scrip­tion drugs, were partly re­spon­si­ble for the low in­fla­tion read­ings. Mo­bile phone prices con­tin­ued to de­cline in July, fall­ing 0.3 per­cent.

Prices of US govern­ment debt ini­tially rose on the in­fla­tion data, but pared gains af­ter Rus­sian For­eign Min­ster Sergei Lavrov said there was a Rus­sianChi­nese plan to defuse ten­sions be­tween the United States and North Korea. The dol­lar was trad­ing lower against a bas­ket of cur­ren­cies, while U.S. stocks rose.

The Fed has a 2 per­cent in­fla­tion tar­get and tracks a mea­sure that has been stuck at 1.5 per­cent since May. In­fla­tion re­mains tame de­spite a tight­en­ing la­bor mar­ket, a co­nun­drum for the cen­tral bank as it con­tem­plates tight­en­ing mon­e­tary pol­icy fur­ther.

The Fed is ex­pected to out­line a pro­gram to start of­fload­ing its $4.2 tril­lion port­fo­lio of Trea­sury bonds and mort­gage-backed se­cu­ri­ties at its Sept. 19-20 pol­icy meet­ing. It is ex­pected to raise in­ter­est rates in De­cem­ber, though such a move would de­pend on fu­ture in­fla­tion data. The Fed has raised bor­row­ing costs twice this year.

“One-time fac­tors that have slowed in­fla­tion will grad­u­ally dis­si­pate,” said Gus Faucher, chief econ­o­mist at PNC Fi­nan­cial Ser­vices in Pitts­burgh. “Stronger wage growth as busi­nesses com­pete for scarce work­ers will also con­trib­ute to higher in­fla­tion in the sec­ond half of this year and in 2018.”

Food prices rose 0.2 per­cent last month, driven by a surge in the cost of meat, fish, eggs, fruits and veg­eta­bles. Food prices were un­changed in June. The cost of food con­sumed at home in­creased 0.2 per­cent. Con­sumers also paid more for pre­scrip­tion drugs, whose prices jumped 1.3 per­cent af­ter in­creas­ing 1.0 per­cent in June. Prices for ap­parel rose 0.3 per­cent af­ter four straight monthly de­clines. While gaso­line prices were un­changed af­ter tum­bling 2.8 per­cent in June, elec­tric­ity prices rose 0.4 per­cent. Rental costs main­tained their up­ward trend last month. Own­ers’ equiv­a­lent rent of pri­mary res­i­dence rose 0.3 per­cent af­ter ad­vanc­ing by the same mar­gin in June.

The cost of new mo­tor ve­hi­cles fell 0.5 per­cent, the big­gest drop since Au­gust 2009 and the sixth con­sec­u­tive monthly de­cline, amid slump­ing de­mand. Low in­fla­tion is a re­lief for many Amer­i­cans who have seen their pay­checks barely in­crease in re­cent years. In an­other re­port, the La­bor De­part­ment said in­fla­tion-ad­justed av­er­age hourly earn­ings in­creased 0.7 per­cent in the 12 months through July, slow­ing from June’s 0.9 per­cent gain. “The Fed may want in­fla­tion to pick up, but that would not be good news to house­holds,” said Joel Naroff, chief econ­o­mist at Naroff Eco­nomic Ad­vi­sors in Hol­land, Penn­syl­va­nia. “The only way spend­ing power has in­creased at all is that in­fla­tion has re­mained be­low the Fed’s tar­get rate.” —Reuters

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.