Modest rise in U.S.
consumer prices may delay Fed rate hike
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[August 12, 2017]
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
"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
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
The dollar <.DXY> was trading lower against a basket of currencies,
while U.S. stocks rose.
The Fed has a 2 percent inflation target and tracks a measure that has
been stuck at 1.5 percent since May.
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Vegetables for sale are pictured inside a Whole Foods Market in the
Manhattan borough of New York City, New York, U.S. June 16, 2017.
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
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
"One-time factors that have slowed inflation will gradually dissipate," said Gus
Faucher, chief economist at PNC Financial 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
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.
"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."
(Reporting by Lucia Mutikani; Editing by Paul Simao)
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