August 30, 2019 / 5:16 PM / 20 days ago

Some temporary weights on U.S. inflation ease in July

WASHINGTON (Reuters) - The U.S. Federal Reserve’s favored measure of inflation increased last month at the pace expected by Wall Street for the first time this year.

FILE PHOTO: People shop at Macy's Department store in New York City, U.S., March 11, 2019. REUTERS/Brendan McDermid

Consumer prices outside food and energy rose 1.6% in the year through July, and the details behind the increase could bolster Fed Chair Jerome Powell’s argument that some of the weakness in inflation this year owes to temporary factors that will lift with time.

However, the Fed has been frustrated by underperforming prices during most months since it set a 2% inflation target in 2012.

Given the odd mix of factors conspiring to keep inflation below target, it may be too soon for the central bank to relax its guard against a slippage in inflation.

WEAK EXPECTATIONS

Wall Street experts have been regularly caught off guard by weak consumer prices this year, which has helped fuel expectations for Fed interest rate cuts.

The persistence of weak inflation despite a healthy job market would give the Fed more space to counter economic weakness created by the U.S.-China trade war and cooling global economy.

(Graphic: below_target link: here)

TEMPORARY FACTORS

Powell argued in a May news conference that some of the weakness in inflation in recent months had owed to temporary factors like a sharp drop in apparel costs and softness in the prices for portfolio management prices.

In July, those two factors helped create the more stable inflation reading, with portfolio management price gains accelerating and prices for apparel falling at a slower pace.

(Graphic: portfolio_apparel link: here)

MARKET VOLATILITY

Prices for apparel fell sharply in year-over-year terms after the government changed its methodology for collecting the data in March, but recently the weakness has abated some.

Portfolio management costs weakened sharply in December and January following a plunge in the U.S. stock market. A subsequent recovery in equity prices has helped portfolio managers charge more for their services, although a recent stock market downturn might point to cooler price gains down the road.

(Graphic: portfolio_stocl link: here)

Reporting by Jason Lange in Washington and Dan Burns in New York; editing by Jonathan Oatis

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