U.S. CPI inflation tame despite economy gaining momentum

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U.S. 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.

New York Fed President William Dudley said the U.S. central bank could raise interest rates next month, citing a tightening labor market that he said was starting to spur faster wage growth.

According to deputy chief economist at TD Securities in New York Millan Mulraine, “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.” 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 percent, while in the 12 months through July, the CPI rose 0.8 percent after increasing 1.0 percent in June.

The so-called core CPI, which strips out the volatile food and energy prices, edged up 0.1 percent in July after rising 0.2 percent in each of the previous three months. The year-on-year core CPI increased 2.2 percent in July after advancing 2.3 percent in June.

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

The weak inflation data, however, pushed the U.S. dollar lower against major currencies. U.S. stock prices slipped from record highs on Dudley’s comments. Yields on U.S. 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. Medical care costs climbed 0.5 percent last month, adding to June’s 0.2 percent gain.

There were also increases in the costs of hospital services, doctor visits and prescription medicine. Rents increased by 0.3 percent. But Americans got some relief from gasoline prices, which dropped 4.7 percent last month, the first decline since February.

The cost of food consumed at home fell for a third straight month, with prices for meat, eggs, dairy and cereals declining. Prices for new motor vehicles rose for the first time since February, while the cost of apparel was unchanged.

In a separate report on Tuesday, the Fed said U.S. industrial production shot up 0.7 percent last month after rising 0.4 percent in June. Production was boosted by a 0.5 percent jump in manufacturing output, the largest gain since July 2015.

Despite benign inflation, economic growth is picking up after output averaged 1.0 percent in the first half of the year.

In a third report, the Commerce Department said housing starts increased 2.1 percent to a seasonally adjusted annual pace of 1.2 million units in July, the highest level since February.

Source : Reuters

 

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