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 The tame inflation backdrop was reinforced by another government
report on Friday showing a modest advance in labor costs in the
first quarter.
Other data showing a drop in consumer sentiment in April, the fourth
consecutive monthly decline, and a softening in factory activity in
the Midwest further supported the case for a single rate hike in
2016.
The data suggest, at least for now, that the economy will probably
not rebound strongly in the second quarter after growth slowed to a
crawl in the first three months of the year.
"The tone of these reports was quite weak, playing into the current
narrative of weakening growth and the subdued inflationary
momentum," said Millan Mulraine, deputy chief economist at TD
Securities in New York. "We are expecting only one rate hike this
year, with that move coming in September."
The Commerce Department reported that the personal consumption
expenditures (PCE) price index, excluding the volatile food and
energy components, edged up 0.1 percent last month after increasing
0.2 percent in February.
The so-called core PCE, which is the U.S. central bank's preferred
inflation measure and is running below its 2 percent target, rose
1.6 percent in the 12 months through March, after advancing 1.7
percent in February.
Following its latest policy meeting this week, the Fed said it was
continuing to "closely" monitor inflation. It left its benchmark
overnight interest rate unchanged and suggested it was in no hurry
to tighten monetary policy further.
The central bank hiked rates in December for the first time in
nearly a decade and Fed policymakers earlier this year forecast two
more rate hikes for 2016. But market-based measures of Fed policy
expectations mostly lean to one hike this year.
The dollar fell to an eight-month low against a basket of currencies
on the data. U.S. stocks tumbled and prices for U.S. government
bonds weakened marginally.
MODEST WAGE INFLATION
In a separate report, the Labor Department said its employment Cost
Index, the broadest measure of labor costs, increased 0.6 percent in
the first quarter after gaining 0.5 percent in the fourth quarter.
Labor costs rose 1.9 percent in the 12 months through March, well
below the 3 percent threshold that economists say is needed to bring
inflation closer to the Fed's inflation target. The ECI increased
2.0 percent in the year to December.
The ECI is widely viewed by policymakers and economists as one of
the better measures of labor market slack. It is also considered a
better predictor of core inflation.
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A strong dollar and lower energy prices are constraining inflation.
Wage growth has been frustratingly slow and could remain moderate as
the fairly robust labor market attracts people who had given up
looking for work.
Though employment gains have been broad, they have tended to be
concentrated in the services industries, especially restaurants and
the retail sector, which typically pay less compared to
manufacturing and construction jobs.
Lack of strong wage growth has contributed to moderate consumption
growth. Consumer spending, which accounts for more than two-thirds
of U.S. economic activity, ticked up 0.1 percent in March after a
0.2 percent gain in February.
The consumer spending figures were included in Thursday's gross
domestic product report, which showed the economy growing at a 0.5
percent annual rate in the first quarter, a sharp slowdown from the
fourth quarter's 1.4 percent pace.
With income rising 0.4 percent in March and savings jumping to a
more than three-year high last month, consumer spending is expected
to regain momentum.
But households are likely to remain hesitant to loosen their purse
strings in the near term, with a third report on Friday showing the
University of Michigan's consumer sentiment index dipped to 89.0 in
April from a reading of 91.0 in March.
"There is scope for households to draw down their savings in the
second quarter," said Steve Murphy, a U.S. economist at Capital
Economics in Toronto. "When combined with healthy employment gains,
healthy balance sheets, we think the conditions are ripe for a
rebound in consumption growth in the second quarter."
In a fourth report, the Institute for Supply Management-Chicago said
its Chicago business barometer declined 3.2 points to a reading of
50.4 in April as new orders fell and factory employment contracted.
The report pointed to further downside risks to the troubled
manufacturing sector.
(Reporting by Lucia Mutikani; Editing by Paul Simao)
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