Flat US in­fla­tion in June raises ques­tions for Fed

Muscat Daily - - BUSINESS -

Wash­ing­ton, US - Cheap en­ergy prices kept US in­fla­tion flat in June, ac­cord­ing to data re­leased on Fri­day, again rais­ing ques­tions about the cen­tral bank’s case for con­tin­ued in­ter­est rate in­creases.

The fall­ing price of petrol also helped hold down US re­tail sales, which con­tracted for the sec­ond straight month in June, while man­u­fac­tur­ing out­put rose slightly but slowed in the sec­ond quar­ter, ac­cord­ing to two sep­a­rate re­ports on Fri­day.

Slow in­fla­tion and stag­nant wage growth has baf­fled economists given the very low un­em­ploy­ment rate, but US cen­tral bankers con­tinue to say they ex­pect in­fla­tion to re­bound al­low­ing them to raise the bench­mark in­ter­est rate grad­u­ally.

The Fed has raised rates twice this year and is ex­pected to do so once more, though prob­a­bly not un­til De­cem­ber.

How­ever, ‘The cur­rent data pro­vide few re­as­sur­ances for the Fed­eral Re­serve’ about the growth out­look, econ­o­mist Diane Swonk said. “The prospects for a third hike in short-term in­ter­est rates this year con­tinue to dim.”

The Con­sumer Price In­dex (CPI), which tracks the costs of house­hold goods and ser­vices, was un­changed last month af­ter fall­ing 0.1 per cent in May, the La­bor De­part­ment re­ported.

The less volatile 12 month CPI mea­sure slowed three tenths from May to 1.6 per cent, mean­ing it has slowed by more than a full per­cent­age point since February, re­treat­ing fur­ther from the Fed’s two per cent target.

How­ever, CPI ex­clud­ing food and en­ergy, cat­e­gories which can see big swings, rose 0.1 per cent last month, the third straight in­crease. The an­nual core in­fla­tion rate was 1.7 per cent, the same as May but six tenths slower than January.

The an­nual pace of in­fla­tion so far in 2017 has been less than half that recorded at this point last year.

Fed­eral Re­serve chair Janet Yellen has at­trib­uted the slow in­fla­tion this year to one-off, ‘tran­si­tory’ fac­tors, although she said cen­tral bankers are watch­ing the data care­fully.

But Chris Low of FTN fi­nan­cial said the tran­si­tory weak in­fla­tion was start­ing to over­stay its wel­come.

‘There was wide­spread price weak­ness in com­po­nents stretch­ing far be­yond cell phone plans and pre­scrip­tion drugs’, he said in a re­search note, point­ing to the main fac­tors Yellen has cited.

Joel Naroff of Naroff Eco­nomic Ad­vi­sors told clients the eco­nomic pic­ture fac­ing the Fed was clearly not what the cen­tral bank hoped for.

‘With in­fla­tion low, con­sump­tion soft and man­u­fac­tur­ing growth medi­ocre, it is hard to say the econ­omy’s an­i­mal in­stincts are out in full force’, he wrote.

In­dus­trial pro­duc­tion rose for the fifth straight month in June, in­creas­ing 0.4 per cent on a con­tin­ued rise in oil and gas drilling and coal min­ing.

How­ever, man­u­fac­tur­ing out­put was up just 0.2 per cent and is up 1.2 per cent year-over-year, with ca­pac­ity well be­low its peak.

In the re­tail sec­tor, Amer­i­cans in June spent less on restau­rants, bars and gro­ceries, while the tran­si­tion from de­part­ment stores to on­line re­tail­ers like Ama­zon con­tin­ued.

Over­all re­tail sales fell 0.2 per cent for the month to US$473.5bn, a sur­prise to an­a­lysts who had fore­cast an in­crease of 0.1 per cent.

Weak auto sales, which have been down in the first half of 2017, were not to blame this time: Ex­clud­ing that volatile cat­e­gory, sales were still down 0.2 per cent.

Petrol sta­tions, how­ever, saw a 1.3 per cent drop in sales last month, a time when Amer­i­cans tra­di­tion­ally hit the road for sum­mer hol­i­days push­ing petrol prices higher.

For the April-June pe­riod, sales were up 3.8 per cent over the same quar­ter of 2016.

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