Core consumer prices in the US rose by their quickest pace in a decade in July and topped market forecasts, keeping the Federal Reserve on track to raise interest rates two more times this year.
The data continue to paint a robust picture of the US economy, which was revealed to have grown by a speedy annual rate of 4.1 per cent in the June quarter and is seeing the unemployment rate close to its lowest level in 18 years.
Growth in headline consumer prices held steady at 2.9 per cent year-on-year in July from a year ago, buoyed by higher fuel prices and in line with the median forecast among analysts surveyed by Thomson Reuters.
But core inflation, which strips out volatile energy and food prices and is of greater importance to the Fed’s policy decisions, rose at a yearly pace of 2.4 per cent in July and up from 2.3 per cent in June.
That was the fastest annual pace of core inflation since September 2008, and topped market forecasts for 2.3 per cent.
In the statement accompanying its decision earlier this month to keep interest rates steady, the Fed reiterated that core inflation had remained near 2 per cent and “indicators of longer-term inflation expectations are little changed, on balance.”
The Fed has already raised interest rates twice this year, and is expected next month to pull the trigger on the first of two additional rate rises forecast for the remainder of 2018.
Jay Powell, Fed chair, said last month in his semi-annual testimony to the Senate Banking Committee that with a strong job market and inflation close to the central bank’s target of 2 per cent, the FOMC “believes that — for now- the best way forward is to keep gradually raising the federal funds rate.”
Before the House Financial Services Committee the following day, Mr Powell added he was “slightly more worried about lower inflation still”, noting that inflation had long undershot the central bank’s 2 per cent target.
The US dollar was relatively steady following the inflation data. The DXY index, tracking the US currency against a weighted basket of global peers, was up 0.6 per cent following the inflation figures, having been up by roughly as much beforehand. The index rose above 96 today for the first time in 11 months.
With the US now locked in a trade war with China and other allies, Ben May at Oxford Economics suggested that US protectionism is likely to be mildly inflationary in the US, but could have modest deflationary impacts in the rest of the world over the medium-term.
“The various tariffs already announced or threatened by the US are expected to have only a modest upward impact on US inflation. Tariffs — of 25 per cent on $50bn of Chinese products and 10 per cent on a further $200bn — would represent around 0.2 per cent of annual US household spending. The overall impact would be less: substitution towards non-Chinese products may lessen the hit; Chinese and US firms may bear some of the costs; and some tariff revenues may be redistributed back to domestic producers,” he wrote in a note.