Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Modest rise in U.S. consumer prices may delay Fed rate hike

Published 08/11/2017, 12:05 PM
Updated 08/11/2017, 12:05 PM
© Reuters. Vegetables for sale are pictured inside a Whole Foods Market in the Manhattan borough of New York City

© Reuters. Vegetables for sale are pictured inside a Whole Foods Market in the Manhattan borough of New York City

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices rose slightly in July as higher food costs were partly offset by falling prices for a range of other goods, suggesting benign inflation that could persuade a cautious Federal Reserve to delay raising interest rates until December.

But with the labor market near full employment and economic growth accelerating, analysts expect the U.S. central bank will announce a plan to start unwinding its massive bond portfolio at its policy meeting next month.

"We believe the Fed will focus on the balance sheet in September, foregoing another rate hike until December," said James Bohnaker, an economist at IHS Markit in Lexington, Massachusetts. "The inflation outlook will not change drastically anytime soon."

The Labor Department said on Friday its Consumer Price Index edged up 0.1 percent last month after being unchanged in June. That lifted the year-on-year increase in the CPI to 1.7 percent from 1.6 percent in June.

Economists had forecast the CPI rising 0.2 percent in July and climbing 1.8 percent year-on-year.

Stripping out the volatile food and energy components, consumer prices gained 0.1 percent for the fourth straight month. The so-called core CPI rose 1.7 percent in the 12 months through July and has now increased by that margin for three consecutive months.

Despite the modest gain in consumer prices, which came on the heels of a drop in producer prices in July, many economists continue to share the Fed's conviction that transitory factors were holding back inflation.

Fed Chair Janet Yellen told lawmakers last month that "some special factors," including prices for mobile phone plans and prescription drugs, were partly responsible for the low inflation readings. Mobile phone prices continued to decline in July, falling 0.3 percent.

Prices of U.S. government debt initially rose on the inflation data, but pared gains after Russian Foreign Minster Sergei Lavrov said there was a Russian-Chinese plan to defuse tensions between the United States and North Korea.

The dollar (DXY) was trading lower against a basket of currencies, while U.S. stocks rose.

FED'S CONUNDRUM

The Fed has a 2 percent inflation target and tracks a measure that has been stuck at 1.5 percent since May.

Inflation remains tame despite a tightening labor market, a conundrum for the central bank as it contemplates tightening monetary policy further.

The Fed is expected to outline a program to start offloading its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its Sept. 19-20 policy meeting.

It is expected to raise interest rates in December, though such a move would depend on future inflation data. The Fed has raised borrowing costs twice this year.

"One-time factors that have slowed inflation will gradually dissipate," said Gus Faucher, chief economist at PNC Financial (NYSE:PNC) Services in Pittsburgh. "Stronger wage growth as businesses compete for scarce workers will also contribute to higher inflation in the second half of this year and in 2018."

Food prices rose 0.2 percent last month, driven by a surge in the cost of meat, fish, eggs, fruits and vegetables. Food prices were unchanged in June. The cost of food consumed at home increased 0.2 percent.

Consumers also paid more for prescription drugs, whose prices jumped 1.3 percent after increasing 1.0 percent in June. Prices for apparel rose 0.3 percent after four straight monthly declines. While gasoline prices were unchanged after tumbling 2.8 percent in June, electricity prices rose 0.4 percent.

Rental costs maintained their upward trend last month. Owners' equivalent rent of primary residence rose 0.3 percent after advancing by the same margin in June.

The cost of new motor vehicles fell 0.5 percent, the biggest drop since August 2009 and the sixth consecutive monthly decline, amid slumping demand.

Low inflation is a relief for many Americans who have seen their paychecks barely increase in recent years. In another report, the Labor Department said inflation-adjusted average hourly earnings increased 0.7 percent in the 12 months through July, slowing from June's 0.9 percent gain.

© Reuters. Vegetables for sale are pictured inside a Whole Foods Market in the Manhattan borough of New York City

"The Fed may want inflation to pick up, but that would not be good news to households," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "The only way spending power has increased at all is that inflation has remained below the Fed's target rate."

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.