Core consumer prices in the US rose at an annual rate of 1.6 per cent in June, a pick-up in inflation that gives the Federal Reserve little scope to stimulate the economy.
The Fed looks at the core consumer price index, which strips out volatile food and energy prices, as the best guide to underlying inflationary pressures. It rose by 0.3 per cent from May to June – or an annualised rate over the last three months of 2.9 per cent – which is well ahead of the Fed’s goal of 2 per cent or a bit below.
Core inflation continued to climb faster than expected as Americans paid more for cars, clothing and rent. Some of the rise may be due to the Japanese tsunami, which led to some supply shortages for cars.Even though the Fed expects the rise in the CPI to fade away, it is highly unlikely to launch another round of quantitative easing, or QE3, while inflation is heading upwards.
“Core inflation . . . is moving higher at both the retail and wholesale level and the back-to-back readings of 0.3 per cent on the monthly change in core CPI should be particularly troubling for the Fed,” said Conrad DeQuadros and John Ryding of RDQ Economics. “The only thing that looks transitory in this inflation report is the drop in energy prices with July’s gasoline prices on track to add 0.2 percentage points to inflation in the month.”
The headline CPI from the labour department fell by 0.2 per cent in June as the price of oil moderated from spikes earlier this year. That was more than the 0.1 per cent forecast by economists.
While June’s drop in fuel prices was the steepest since 2008, retailers raised the cost of other key items as they face higher costs from wholesalers. Prices of used cars and trucks rose 1.6 per cent, new car prices gained 0.6 per cent, clothing was 1.4 per cent more expensive and rents rose 0.1 per cent.
A separate report on Friday showed US consumer sentiment fell to the lowest level since March 2009, fuelled by worries about the struggling labour market and falling incomes.
The Thomson Reuters/University of Michigan consumer sentiment index fell to a preliminary reading of 63.8 in July from 71.5 in June. Economists had predicted the index would rise to 72.5.
“This has got to be a real concern for those looking for the US consumer to start spending again in the second quarter. An unhappy consumer simply doesn’t spend at the same pace as one that feels good about the future,” said David Semmens, US economist at Standard Chartered.
Consumers’ assessment of current conditions hit the lowest level since November 2009, falling to 76.3 from 82 in June, while expectations dropped to 55.8 from 64.8.
“Whenever the expectations index has been this low in the past, the economy has been in recession,’’ said Richard Curtin, the survey’s director. But he warned that a single month of poor data “is insufficient to signal a renewed downturn”.
Consumers pared back their expectations for inflation, with the outlook for one-year inflation down to 3.4 per cent from 3.8 per cent and the five-year outlook slipping to 2.8 per cent from 3 per cent.
Also on Friday, the Federal Reserve said industrial production ticked up 0.3 per cent in June after declining 0.1 per cent in May. Supply chain disruptions stemming from the Japanese disaster left manufacturing unchanged over the month, but that was offset by a 0.9 per cent gain in utilities output and a 0.5 per cent rise in mining production.
