The U.S. cost of living was little changed in July, a sign subdued inflationary pressures will give Federal Reserve policy makers reason to keep interest rates low.
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Tuesday’s tame inflation report from the Labor Department came in the wake of a soft July retail sales report last week that cast doubts on the US central bank’s ability to raise borrowing costs even as the labor market tightens.
The Labor Department showed its Consumer Price Index fell to 0.0% month-on-month during the seventh month of the year, following the 0.2% rise seen in June.
Despite some unwinding of a June surge, airfares still posted a seasonal rise this month, but the 15.9 percent increase was smaller than the 21.6 percent gain recorded a year ago, thereby pushing down on the annual inflation rate.
At its last meeting, the Fed noted that risks to the economic outlook had diminished, opening the possibility of a rate hike later this year. The Fed raised its benchmark overnight interest rate in December for the first time in almost a decade.
With the labor market perceived to be either at or near full employment, Fed officials are focused on persistently low United States inflation.
Adding to the indications that the Fed could pursue a more aggressive interest rate path, New York Fed President William Dudley told the Fox Business Network Tuesday morning that a hike as soon as the September 20-21 meeting is “possible”. Import prices overall rose 6.5% in July from a year earlier, the steepest gain since December 2011, the ONS said.
In contrast, the Retail Price Index (RPI), which determines how much regulated rail fares will increase, rose to 1.9% in July.
Alcohol prices also increased – a 2.3 per cent rise in the cost of spirits on the month bucked a previous trend of falling prices.
The shelter index, which indicates housing prices, rose 0.2%, its smallest increase since March.
In addition, the full implementation of the recommendations of the Seventh Central Pay Commission in terms of payment of allowances will affect the magnitude of the impact house rents have on CPI, it said.
But Americans got some relief from gasoline prices, which dropped 4.7 per cent last month, the first decline since February, reflecting renewed declines in crude oil prices. Headline prices didn’t make any progress in July as energy costs fell. The government has recently notified the new inflation target of 4% – plus/minus 2% – for the next five years and rising price pressure will test the new RBI governor who will replace Raghuram Rajan.
The Federal Reserve said Tuesday that factory output grew 0.5 percent in July, after a 0.3 percent gain in June.
Analysts expect British inflation to rise further in the coming months as the pound battles weakness against the dollar and euro. This fall’s USA presidential election adds uncertainly to the economic outlook and could make some policy makers cautious. It was at 1.62 per cent in June.
“As such we continue to maintain our call of 25 basis points ease in policy repo rate in the third quarter of FY-17”.
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The firming housing market is boosting home improvement retailers such as Home Depot Inc.
