US inflation rise ties Fed’s hands on further easing

Posted: June 15, 2011 in Economic Crisis

Robin Harding
Financial Times
June 15, 2011

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.

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