WASHINGTON: US consumer spending rose slightly less than expected in July and annual inflation advanced at its slowest pace in more than 1-1/2 years, diminishing expectations of an interest rate increase in December.
Inflation remains stubbornly low even as the labour market is near full employment, a conundrum for the Federal Reserve. Other data showed a small increase in new applications for unemployment benefits last week amid a tightening job market.
“The consumer continues to do the heavy lifting when it comes to economic growth,” said Chris Rupkey, chief economist at MUFG in New York. “Inflation is in the slow lane for now and this is likely to make Fed officials cautious on the need to raise rates a third time this year.”
The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.3 per cent last month after a 0.2 per cent gain in June. Economists had forecast consumer spending rising 0.4 per cent in July.
The personal consumption expenditures (PCE) price index excluding food and energy edged up 0.1 per cent in July. The so-called core PCE price index, which is the Fed’s preferred inflation measure, has now risen by the same margin for three straight months.
The 12-month increase in the core PCE price index dipped to 1.4 per cent, the smallest gain since December 2015. The index rose 1.5 per cent in the 12 months through June. The annual rate has dropped by half a percentage point since February and the PCE price index has undershot the US central bank’s 2 per cent target for the past five years.
The combination of moderate consumer spending and tepid inflation casts doubts on whether the Fed will increase interest rates at its December policy meeting, as most economists expect.
The Fed has raised borrowing costs twice this year. It is, however, expected to announce a plan to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities next month.
“We expect core inflation to get worse on a year-over-year basis before it gets better, making it an easy decision for the Fed to skip raising rates at its September meeting and focus on the balance sheet only,” said Ellen Zentner, chief US economist at Morgan Stanley in New York.
Financial markets are pricing in a roughly 31 per cent probability of a rate increase at the Fed’s December meeting, down from about 35 per cent earlier, according to CME Group’s FedWatch programme.
US stocks were trading higher on the diminishing rate hike prospects, as were prices of US Treasuries. The dollar was flat against a basket of currencies. — Reuters
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