US inflation tame despite economy gaining momentum

WASHINGTON: US consumer prices were unchanged in July but a rise in industrial output and home building suggested a pickup in economic activity that could allow the Federal Reserve to raise interest rates this year.

Tuesday’s economic reports came as influential New York Fed President William Dudley said the US central bank could raise interest rates next month, citing a tightening labor market that he said was starting to spur faster wage growth.

“The strong housing starts and industrial output performance will bolster the Fed confidence that growth momentum has rebounded, potentially supporting the bias for a near-term hike,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

“Nevertheless, with inflation continuing to miss to the downside, the case for caution remains strong.”

July’s unchanged reading in the Consumer Price Index followed two straight monthly increases of 0.2 per cent, while in the 12 months through July, the CPI rose 0.8 per cent after increasing 1.0 per cent in June.

The so-called core CPI, which strips out the volatile food and energy prices, edged up 0.1 per cent in July after rising 0.2 per cent in each of the previous three months.

The year-on-year core CPI increased 2.2 per cent in July after advancing 2.3 per cent in June.

The Fed has a 2.0 per cent inflation target and tracks an alternative inflation measure which has been stuck at 1.6 per cent since March.

The New York Fed’s Dudley told Fox Business television on Tuesday that “it’s possible” for the Fed to hike rates at its Sept 20-21 policy meeting.

Atlanta Fed President Dennis Lockhart also told reporters that he was not ruling out a move next month. The Fed raised its benchmark overnight interest rate last December for the first time in nearly a decade. Fed officials view the labor market as either at or near full employment.

Following Dudley’s remarks, financial markets were placing a 58.9 per cent probability of a rate increase at the Fed’s December policy meeting, up from 46.7 per cent late on Monday, according to CME Group’s FedWatch tool. A September rate hike has been virtually priced out.

The weak inflation data, however, pushed the US dollar lower against major currencies.

US stock prices slipped from record highs on Dudley’s comments. Yields on US government debt rose.

With rents and healthcare costs continuing to rise, some economists do not expect July’s moderation in underlying inflation to be sustained. — Reuters