US core inflation firming, but Fed still seen cutting rates next week

washington — US underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week to support a slowing economy.

Other data on Thursday showed the number of Americans filing applications for unemployment benefits dropped to a five-month low last week suggesting the labor market remains healthy, which should continue to underpin consumer spending even as hiring has cooled. The longest economic expansion on record is under threat from the White House’s year-long trade war with China.

Fed Chair Jerome Powell said last week he was not forecasting or expecting a recession, but reiterated the U.S. central bank would continue to act “as appropriate” to keep the expansion now in its 11th year on track. But the firming inflation trend, if sustained, could constrain the Fed’s ability to ease monetary policy further. “Concerns about toolow inflation appear misguided,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The Fed will still cut rates next week to provide added insurance in the event that the trade war escalates, but it might think twice about moving again in October if core inflation shows any further spark.”

The Labor Department said its consumer price index excluding the volatile food and energy components gained 0.3per cent for a third straight month.