September 17, 2010 / 12:44 PM / 9 years ago

Core CPI flat, deflation fears linger

WASHINGTON (Reuters) - Underlying U.S. inflation pressures were muted in August and consumer morale hit a 13-month low this month, keeping fears of deflation alive and spurring bets on further monetary easing.

A woman shops for groceries at a Whole Foods supermarket in New York in this May 18, 2010 file photo. REUTERS/Shannon Stapleton

Consumer prices rose 0.3 percent last month as food prices rebounded and energy costs marched higher, the Labor Department said on Friday. But core prices, which ignore volatile food and energy costs, were unexpectedly flat.

Bond traders pushed up prices for U.S. government debt on speculation the Federal Reserve would eventually have to resume large-scale debt purchases to spur the economy and keep the risk of a downward spiral in prices at bay.

The data was not so weak, however, to build a case for a surprise easing when the U.S. central bank meets on Tuesday.

“It keeps alive the possibility that the (inflation) trend could turn negative over the next year or two, but the numbers are not weak enough to encourage them to start a new purchasing program next week,” said Jim O’Sullivan, chief economist at MF Global in New York.

Financial markets had expected the core Consumer Price Index to edge up 0.1 percent, with the overall index posting a 0.2 percent gain.

Another report showed consumer sentiment deteriorated in early September. The Thomson Reuters/University of Michigan’s preliminary September reading on consumer sentiment moved down to 66.6, the weakest reading since August 2009, from 68.9 in August.

The data helped keep a lid on stock prices, which ended flat, despite solid earning from technology bellwether Oracle Corp and Research in Motion.

The U.S. dollar rose against the euro as investors turned more risk averse and fears of intervention by Japanese authorities kept it near a one-month high versus the yen.


Although recent data have pointed to some improvement in domestic demand, it remains tepid. Weak demand and a 9.6 percent unemployment rate are expected to keep inflation pressures under wraps, with some economists continuing to worry prices could eventually begin a troubling downward slide.

Jobs scarcity helped to push household wealth down $1.5 trillion in the second quarter to $53.5 trillion, well below the $64.2 trillion reached at the end of 2007 just as the U.S. economy began tumbling into recession, Fed data showed.

Many analysts believe the Fed will resume large-scale purchases of longer-term U.S. government bonds in coming months in an effort to keep borrowing costs low, but the policymakers who gather on Tuesday differ on the wisdom of a further easing in monetary policy and what threshold should be met before taking action.

The central bank already has cut overnight interest rates to near zero and pumped more than $1.7 trillion into the economy with purchases of Treasury and mortgage-related debt.

“We expect the Fed to formalize the bias toward easing, but they will probably wait until November to initiate balance sheet expansion,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

In the 12 months to August, the overall CPI rose 1.1 percent, a touch less than the 1.2 percent increase through July. The year-on-year core rate was up only 0.9 percent for a fifth straight month.

Flat housing costs and weak prices for apparel dampened the core CPI in August. Some economists said a decline in rental costs was surprising, given that vacancies were no longer rising, and said deflation fears were overdone.

“The period of disinflation in core consumer prices has largely run its course,” said Peter Newland, an economist at Barclays Capital in New York.

“We doubt that the declines in rents, lodging away from home and apparel, which tipped the balance toward a flat core will persist. The chances of outright deflation in the core CPI remain small.”

Despite lackluster demand, the auto sector is still managing to push through more price increases. New vehicle prices increased 0.3 percent last month, the largest gain since November. Prices for used cars and trucks increased 0.7 percent.

Additional reporting by Glenn Somerville in Washington and Richard Leong in New York; Editing by Andrea Ricci

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