United States: Persistently soft inflation prompts doubts about further Fed hikes this year
June 14, 2017
Consumer prices adjusted for seasonal factors inched down 0.1% from the previous month in May. This contrasted April’s 0.2% increase and came as a disappointment to market analysts who had expected prices to remain unchanged. Although the anticipated plunge in gasoline prices largely drove May’s bleak result, the lack of price traction in the rest of the components, despite an outstandingly strong labor market, has raised further doubts about whether the Federal Reserve will be able to hike rates for a third time this year. In addition to lower energy prices, the May report showed lower charges for apparel and medical services, which more than offset higher prices for food and housing.
Inflation eased from 2.2% in April to 1.9% in May, the lowest reading in half a year. Nonetheless, the deceleration did not prevent annual average inflation from inching up from April’s 1.7% to 1.8% in May. This marked the fastest pace of inflation since March 2013.
Core consumer prices, which exclude food and energy prices, rose 0.1% from the previous month in May, mirroring April’s increase. Core inflation eased from 1.9% in April to 1.7% in May, the weakest figure since in two years. Although the Federal Reserve targets an alternative measure of inflation called the personal consumption expenditures price index (PCEPI), it also follows the core inflation measure closely to judge whether inflationary pressures are increasing in the economy.
Notwithstanding the string of weak inflation readings, our panel continues to see inflation trending somewhat higher later this year. Against a backdrop of steadily tightening U.S. labor market, wages are expected to eventually gain momentum, which should lead to higher inflation. In addition, ISM reports continue to suggest that price pressures are mounting at the producer level, while the weakening of the dollar seen so far this year should eventually increase import prices.
Author: David Ampudia, Economist