Date
22 October 2019
Federal Reserve policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions and slowing growth. Photo: AFP
Federal Reserve policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions and slowing growth. Photo: AFP

Muted US inflation strengthens case for Fed rate cut

US consumer prices barely rose in May, pointing to moderate inflation that together with a slowing economy increased pressure on the Federal Reserve to cut interest rates this year, Reuters reports.

But the report from the Labor Department on Wednesday is not likely to shift Fed officials’ views that temporary factors are behind the weak inflation readings.

Airline fares, among the transitory factors identified by Fed Chairman Jerome Powell, rebounded and apparel prices stabilized after two straight monthly decreases.

US central bank policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions, slowing growth and a sharp step-down in hiring in May that has led financial markets to price in at least two rate cuts by the end of 2019. A rate cut is not expected next Wednesday.

“This soft inflation backdrop reinforces our call for two [rate] cuts later this year,” said Michael Feroli, an economist at JPMorgan in New York. “We think next week is probably too soon to expect that action, given that growth is still holding in and trade-related risks remain two-sided.”

The consumer price index edged up 0.1 percent last month as a rebound in the cost of food was offset by cheaper gasoline, the government said. The CPI gained 0.3 percent in April.

In the 12 months through May, the CPI increased 1.8 percent, slowing from April’s 1.9 percent gain. May’s rise in the CPI was broadly in line with economists’ expectations.

Excluding the volatile food and energy components, the CPI nudged up 0.1 percent for the fourth straight month, the longest such stretch since April 2017. The so-called core CPI was held down by a sharp decline in the prices of used cars and trucks as well as motor vehicle insurance.

In the 12 months through May, the so-called core CPI rose 2.0 percent after advancing 2.1 percent in April.

US Treasury prices were trading mostly higher, while the dollar was little changed against a basket of currencies. Stocks on Wall Street slipped as the rate-cut hopes were overshadowed by investor anxiety over the US-China trade war.

Growth slowing

US President Donald Trump in early May slapped additional tariffs of up to 25 percent on US$200 billion of Chinese goods, prompting retaliation by Beijing. Trump on Monday threatened further duties on Chinese imports if no deal was reached when he meets Chinese President Xi Jinping at a G20 summit at the end of this month in Japan.

Economists have warned that the tariffs will undercut the economy, which will celebrate 10 years of expansion in July, the longest in history. Powell said last week the Fed was closely monitoring the implications of the trade war on the economy and would “act as appropriate to sustain the expansion”.

Data so far have suggested a sharp slowdown in US economic growth in the second quarter after a temporary boost from exports and an accumulation of inventory early in the year. Job growth slowed sharply in May. Manufacturing production, exports and home sales dropped in April, while consumer spending cooled.

The Atlanta Fed is forecasting gross domestic product to increase at a 1.4 percent annualized rate in the April-June quarter. The economy grew at a 3.1 percent pace in the first quarter.

A survey of chief executive officers published on Wednesday showed unease about trade policy negatively impacting sales expectations as well as capital spending and hiring plans over the next six months.

The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, increased 1.6 percent in the year to April after gaining 1.5 percent in March. Data for May will be released later this month. The core PCE price index has been running below the Fed’s 2 percent target this year.

– Contact us at [email protected]

CG