Rise in inflation puts pressure on US rates
Rise in inflation puts pressure on US rates
By Krishna Guha and Christopher Swann in Washington and Jennifer Hughes in New York
Published: June 14 2006 13:33 | Last updated: June 14 2006 21:40. Copyright by The Financial Times
US inflation rose more quickly than expected for the third successive month in May, raising the prospect that interest rates will continue to rise beyond this month.
The core consumer price index – which excludes volatile food and energy prices – rose 0.3 per cent in May, taking the annual rate to 2.4 per cent.
The figures heighten the dilemma for the Federal Reserve, which may now feel forced to continue to raise rates in spite of growing signs that the economy is slowing.
The futures market yesterday priced in a near 100 per cent certainty that the Fed would raise interest rates to 5.25 per cent later this month, and doubled the chance of another rise in August to 44 per cent.
The stock market absorbed the news calmly, with shares edging up in early trading but Treasury bonds fell sharply. Yields on two-year Treasury bills rose eight basis points to 5.08 per cent, the highest level since January 2001.
The yield curve inverted further, suggesting the market thinks it is increasingly likely that more rate rises will slow the economy.
The May inflation rise pushed the three-month annualised rate of core inflation, recently highlighted by Ben Bernanke, Fed chairman, up from 3.2 per cent to 3.8, the highest since March 1995.
“It does raise the probability of a further rate rise in August,” said Jan Hatzius, chief US economist at Goldman Sachs. He said such a move would be a mistake and would raise the likelihood of a hard landing next year.
The unexpectedly big rise in core inflation was driven by a rapid increase in the imputed cost of home ownership, which rose 0.6 per cent in May.
This was due to a combination of a pick-up in market rents as high prices and a cooling-off of house price inflation encouraged more Americans to rent rather than buy, and technical adjustments.
Excluding the cost of home ownership, the core inflation rate rose 0.2 per cent month on month, in line with market forecasts. The headline rate of inflation, including energy costs, rose 0.4 per cent in May, boosted by a 4.9 per cent increase in petrol prices.
Mickey Levy, chief economist at Bank of America, said the broad inflation picture clearly showed the pressure of excess demand on supply after years of rapid growth. “The Fed would definitely like to pause but I don’t think that it will be able to,” he said.
Stephen Gallagher, US economist at Société Générale, said the prospect of more rate rises heightened “the chance the Fed will overshoot the target and prompt a greater slowing than necessary to curb inflation”.
By Krishna Guha and Christopher Swann in Washington and Jennifer Hughes in New York
Published: June 14 2006 13:33 | Last updated: June 14 2006 21:40. Copyright by The Financial Times
US inflation rose more quickly than expected for the third successive month in May, raising the prospect that interest rates will continue to rise beyond this month.
The core consumer price index – which excludes volatile food and energy prices – rose 0.3 per cent in May, taking the annual rate to 2.4 per cent.
The figures heighten the dilemma for the Federal Reserve, which may now feel forced to continue to raise rates in spite of growing signs that the economy is slowing.
The futures market yesterday priced in a near 100 per cent certainty that the Fed would raise interest rates to 5.25 per cent later this month, and doubled the chance of another rise in August to 44 per cent.
The stock market absorbed the news calmly, with shares edging up in early trading but Treasury bonds fell sharply. Yields on two-year Treasury bills rose eight basis points to 5.08 per cent, the highest level since January 2001.
The yield curve inverted further, suggesting the market thinks it is increasingly likely that more rate rises will slow the economy.
The May inflation rise pushed the three-month annualised rate of core inflation, recently highlighted by Ben Bernanke, Fed chairman, up from 3.2 per cent to 3.8, the highest since March 1995.
“It does raise the probability of a further rate rise in August,” said Jan Hatzius, chief US economist at Goldman Sachs. He said such a move would be a mistake and would raise the likelihood of a hard landing next year.
The unexpectedly big rise in core inflation was driven by a rapid increase in the imputed cost of home ownership, which rose 0.6 per cent in May.
This was due to a combination of a pick-up in market rents as high prices and a cooling-off of house price inflation encouraged more Americans to rent rather than buy, and technical adjustments.
Excluding the cost of home ownership, the core inflation rate rose 0.2 per cent month on month, in line with market forecasts. The headline rate of inflation, including energy costs, rose 0.4 per cent in May, boosted by a 4.9 per cent increase in petrol prices.
Mickey Levy, chief economist at Bank of America, said the broad inflation picture clearly showed the pressure of excess demand on supply after years of rapid growth. “The Fed would definitely like to pause but I don’t think that it will be able to,” he said.
Stephen Gallagher, US economist at Société Générale, said the prospect of more rate rises heightened “the chance the Fed will overshoot the target and prompt a greater slowing than necessary to curb inflation”.
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