Inflation pressures rise modestly in July; Fed on track to raise rates

Washington

US consumer prices rose in July, and the underlying trend continued to strengthen - pointing to a steady increase in inflation pressures that keeps the Federal Reserve on track to gradually raise interest rates.

The Labor Department said on Friday that its consumer price index (CPI) advanced 0.2 per cent, the bulk of which was due to a rise in the cost of shelter. The CPI rose 0.1 per cent in June.

In the 12 months till July, the CPI increased 2.9 per cent, matching the increase in June.

Excluding the volatile food and energy components, the CPI rose 0.2 per cent, the same gain as in May and June. The annual increase in the so-called core CPI was 2.4 per cent, the largest rise since September 2008, from 2.3 per cent in June.

Economists polled by Reuters had forecast both the CPI and core CPI rising 0.2 per cent in July.

US Treasury yields held at three-week lows after the data while the US dollar rose slightly against a basket of currencies. The Fed more closely tracks a different inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, which increased 1.9 per cent in June. That gauge hit the US central bank's 2 per cent target in March for the first time in more than six years, and Fed policymakers have said that they will not be unduly concerned if it overshoots its target in the coming months.

The US central bank has raised rates twice this year, in March and June, and financial markets overwhelmingly expect a hike at the next policy meeting in September.

The Fed currently forecasts a total of four rate rises in 2018, with investors expecting a final nudge upwards of the year in the benchmark overnight lending rate in December.

Inflation pressures are seen continuing to build amid low unemployment and increasing difficulty reported by employers in filling positions. Rising raw material costs are also expected to push up inflation as manufacturers pay more, in part because of tariffs imposed by the Trump administration on lumber, aluminium and steel imports. Last month, petrol prices fell 0.6 per cent after increasing 0.5 per cent in June. Food prices edged up 0.1 per cent after rising 0.2 per cent in June.

Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, advanced 0.3 per cent last month after increasing by the same margin in June. Overall, the so-called shelter index rose 3.5 per cent in the 12 months through July.

Healthcare costs fell 0.2 per cent after gaining 0.4 per cent in June. Prices for new motor vehicles rose 0.3 per cent in July following a 0.4 per cent increase in the prior month. Apparel prices fell 0.3 per cent after declining 0.9 per cent in June. REUTERS