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US core inflation unexpectedly cools on weaker car, drug prices

The numbers will justify the Fed's plan to go into wait-and-see mode about raising interest rates

Washington

A KEY measure of underlying US inflation unexpectedly eased in February amid falling prices for cars and prescription drugs, giving the Federal Reserve more room to stick to its plan to be patient about raising interest rates.

Excluding food and energy, the so-called core consumer price index rose 0.1 per cent from the prior month and 2.1 per cent from a year earlier, going by a Labour Department report on Tuesday.

Those figures trailed the median estimates of economists. The broader consumer price index (CPI) rose 0.2 per cent from January, the first increase in four months, though the 1.5 per cent annual gain missed projections and was the smallest rise since 2016.

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US stock futures and Treasuries rose while the dollar fell. The data suggests that there is a greater chance that inflation won't hold up around the Fed's 2 per cent objective - a development that would discourage policy makers from additional rate increases amid rising risks from weakening global growth.

Fed Chairman Jerome Powell had made clear on Friday that he and his colleagues are in no hurry to adjust interest rates as growth slows and inflation stays subdued. "With nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the committee has adopted a patient, wait-and-see approach," he said in a speech in California.

Responding to questions, he said inflation in the US is low and stable and doesn't react much to slack in the economy. Policy makers will release updated quarterly projections for interest rates as well as inflation, growth and employment when they gather next week.

The Fed has a 2 per cent target for a separate inflation gauge from the Commerce Department that's linked to consumer spending. That index tends to run slightly below the Labour Department's CPI, and January figures are due March 29.

The CPI report showed that prices of new vehicles fell for the first time in four months; used-car prices dropped 0.7 per cent from January, the biggest drop since September.

Prescription-drug prices fell 1 per cent on a monthly basis, the most on record, bringing the annual decline to 1.2 per cent - the largest drop since 1972.

Such figures give President Donald Trump another opportunity to claim credit for lower pharmaceutical prices, an issue that he has tweeted about several times lately.

Shelter costs, which account for about a third of CPI and mainly include housing expenses, continued to hold up, with the fourth straight monthly increase of 0.3 per cent. Owners-equivalent rent, one of the categories designed to track rental prices, rose 0.3 per cent, as did rent of primary residence.

The slowdown in overall inflation is giving Americans more spending power. A separate Labour Department report on Wednesday showed that average hourly earnings, adjusted for inflation, rose 1.9 per cent in February from a year earlier. That compares with 1.6 per cent in the previous month and is the fastest pace since 2015.

Economists had forecast a 0.2 per cent gain in the monthly core gauge and a 2.2 per cent annual advance.

Apparel prices rose 0.3 per cent from the prior month as men's and boys' apparel had a record increase of 3.4 per cent, while women's apparel fell 1.6 per cent, the most in almost a year.

Energy prices rose 0.4 per cent, the first increase in four months, as gasoline prices advanced 1.5 per cent. Food costs gained 0.4 per cent, the biggest increase since 2014.

Expenses for medical care fell 0.2 per cent, the biggest decline since 2013; these readings often vary from results for this category within the Fed's preferred measure of inflation due to different methodologies. BLOOMBERG