US inflation rise ties Fed’s hands on further easing

Core US consumer prices have been reported to be rising at their fastest rate in five years during the month of May. There have been an upward trend in inflation since last October making it more difficult for the Federal Reserve to think about further monetary easing.

By Robin Harding in Washington and Shannon Bond in New York
Published: June 15 2011 14:20 | Last updated: June 15 2011 19:30

Core US consumer prices rose at their fastest rate for five years in May, making it almost impossible for the Federal Reserve to ponder further monetary easing.

Excluding volatile food and energy prices, the consumer price index grew by 0.3 per cent from April to May, the most rapid increase since 2006. Compared with a year earlier prices rose by 1.5 per cent.

Although temporary factors have exaggerated the rise, there has been an upward trend in core inflation since the year-on-year trough of 0.6 per cent last October, leaving the central bank with little scope to spur growth while meeting its inflation objective of 2 per cent.

“It is quite a big increase, although some of it is temporary,” said Paul Ashworth, chief US economist at Capital Economics in Toronto. “Undeniably there is no imminent threat of deflation.”

The Fed concentrates on core inflation, which reflects underlying pressures in the economy, as the best guide to how prices will move. The decline in core inflation towards very low levels last autumn was crucial in its decision to launch a second, $600bn round of asset purchases to boost the economy, which came to be known as QE2.

The higher inflation numbers came on the same day as data showing sluggish industrial production – up by 0.1 per cent in May – and rock bottom confidence among house builders.

The data suggest the US is suffering a mini bout of ‘stagflation’, the combination of stagnant growth and rising inflation, but most economists expect it to end quickly.

Higher commodity prices pushed up core inflation. Dearer cotton fed through to clothing and fuel costs put pressure on items such as airline tickets, but commodity prices have dropped back recently

. There was a 2 per cent fall in petrol prices from April to May and headline inflation, including commodities, fell to 0.2 per cent. That is the slowest rate since last November.

Both growth and inflation were also hit by supply chain disruptions to the car industry after Japan’s tsunami in March. Excluding autos, manufacturing output rose by 0.6 per cent in May.

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