November 19 2017

US consumer prices slipped 0.1 percent in May

November 19 2017, 06:59 | Clarence Walton

A further squeeze on household incomes is another headache for Theresa May as she scrambles to recover from a poor election

A further squeeze on household incomes is another headache for Theresa May as she scrambles to recover from a poor election

Economists were shocked after expecting inflation to remain at 2.7%, but the Brexit-hit Pound pushed up the price of imported goods and energy.

Annual inflation jumped to 2.7 per cent last month, meaning real wages, once consumer price rises are taken into account, fell by 0.6 per cent.

While the US central bank is expected to raise interest rates by 25 basis points at the end of a two-day meeting later on Wednesday, weak inflation, if sustained, could put further monetary tightening this year in jeopardy.

The Food and nonalcoholic beverages group recorded a year-on-year inflation rate increased slightly to 6.7 per cent representing a 0.6 percentage point decrease from the 7.3% recorded in March 2017.

Other data showed a continued rise in the number of people on the so-called claimant count - up for the third month in a row in May to stand at 802,600. Receipts at restaurants and bars dipped 0.1 per cent, while sales at sporting goods and hobby stores fell 0.6 per cent.

The fall was greater when measured over a three-month period, confirming that wages are falling behind the 2.9% inflation rate.

But ONS data showed the rate of increase in factory gate prices "levelled" in May as manufacturing input costs have started to fall month on month - which could provide some respite for consumer prices.

A weaker-than-expected reading on United States consumer prices sent United States government bonds sharply higher, as the data sowed doubts about the likely pace of central bank rate hikes later in the year just hours before it was expected to raise them for a second time in 2017.

Danske Bank economist Conor Lambe said consumers were feeling the pinch as inflation continues to outstrip wage growth.

USD/JPY was at 110.50 from around 110.27 ahead of the release of the data, EUR/USD was trading at 1.1249 from 1.1202 earlier, while GBP/USD was at 1.2765 from 1.2737.

Prices for utilities drove the increase in the overall CPI from April to May as utility companies increased electricity and water usage rates to reflect higher summer costs. That's the fastest rate since June 2013 and is already well above the Bank of England's target of two per cent for the year. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds.

Ulster Bank economist Richard Ramsey warned inflationary pressure is likely to continue during the rest of this year.

The economy grew at a 1.2 percent annualized rate in the first quarter, held back by a near stall in consumer spending and a slower pace of inventory investment.

'We are maintaining our underweight to United Kingdom equities and increasing exposure to defensive large caps using the Fidelity Money Builder Dividend fund at the expense of cyclicals and mid-cap stocks, ' he added.

Nevertheless, James Bohnaker of IHS Markit said seasonal factors likely exaggerated the effect of falling energy prices on overall inflation because gasoline prices typically rise in the spring, ahead of the U.S. driving season.

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