Saturday, June 30, 2007

Core US inflation falls below 2%

Core US inflation falls below 2%
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: June 29 2007 17:55 | Last updated: June 29 2007 17:55

Core inflation fell below 2 per cent for the first time in three years after a modest increase in prices last month, according to new government figures.

A key index of consumer prices, excluding volatile food and energy, climbed only 0.1 per cent in May, which brought the rate for 12 months to 1.9 per cent. High petrol prices drove the headline rate up 0.5 per cent.

The slowdown in core inflation will be welcomed by the Federal Reserve, which on Thursday left interest rates unchanged and kept a resolute focus on risks of future inflation.

In its statement at its June policy meeting, which kept rates at 5.25 per cent, the Fed dropped its description of core inflation as “somewhat elevated” and acknowledged that “readings on core inflation have improved modestly in recent months”.

But it warned that “a sustained moderation in inflation pressures has yet to be convincingly demonstrated.”

Gary Bigg, economist at Bank of America, said of the Federal open market committee: “The FOMC should be quite pleased with recent inflation developments.”

Ethan Harris, chief economist at Lehman Brothers, said the economy was “evolving as the Fed expected” with inflation easing and growth projections also being reined in.

The report from the commerce department on Friday also showed consumer spending and income lower than expected in May.

Personal income increased 0.4 per cent. Consumption spending increased 0.5 per cent for the second consecutive month.

“The slender gain in income will restrain consumption spending,” said Gary Bigg, economist at Bank of America.

“Income and spending gains were weaker than expected, suggesting that spending for the quarter will be soft.”

Economists said higher fuel prices explained much of the spending increase.

Nigel Gault, US economist at Global Insight, said: “Although consumer spending rose by what looks like a robust 0.5 per cent in May, more than half of the increase in spending went into gasoline tanks as consumers were hit by higher gasoline prices.”

”Spending should improve in the second half of the year, with gasoline prices easing back, but not back to the runaway first-quarter pace, as the downturn in the housing market will weigh on consumers,” he said.


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