Rise in inflation puts pressure on US rates
Rise in inflation puts pressure on US rates
By Christopher Swann and Krishna Guha in Washington and Jennifer Hughes in New York
Published: June 14 2006 13:33 | Last updated: June 14 2006 23:48. 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 last month, taking the annual rate to 2.4 per cent.
The figures heighten the dilemma for the Federal Reserve, which may feel forced to continue to raise rates in spite of growing signs that the economy is slowing.
The futures market on Wednesday priced in a near 100 per cent certainty that the Fed would raise interest rates to 5.25 per cent this month, and doubled the chance, to 44 per cent, of another rise in August.
The Fed’s beige book of economic activity reported widespread business concern about high or rising costs, and added “just three districts, Boston, Dallas and Philadelphia, reported that retailers are having success raising retail prices”.
The stock market absorbed the news calmly, with the S&P 500 index rising 0.5 per cent.
However, Treasury bonds fell sharply. Yields on two-year Treasuries rose almost 10 basis points to 5.11 per cent, the highest since December 2000. The yield curve inverted further, suggesting the market thinks it increasingly likely that more rate rises will slow the economy.
President George W. Bush told reporters “the Fed is watching inflation very carefully…that’s Ben Bernanke’s job.”
Mr Bernanke, the Fed chairman, will on Thursday give what is expected to be an important speech on the economy.
The May inflation rise pushed the three-month annualised rate of core inflation 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. Such a move would increase the likelihood of a hard landing next year, he said.
The rise was driven by a rapid increase in “owners’ equivalent rent” – an estimate of the cost of living in your own home, based on what it would cost to rent a similar property. This was due to a technical adjustment and a pick-up in rents as high prices and a cooling-off of house price inflation encouraged more Americans to rent rather than buy.
Excluding this element, the core inflation rate was in line with market forecasts. Headline inflation, including energy costs, rose 0.4 per cent, boosted by a 4.9 per cent increase in petrol prices. There was some evidence higher energy prices were being passed on, with air fares rising 2.6 per cent over the month.
Mickey Levy, chief economist at Bank of America, said: “There has been a clear upward drift in inflation and it is going to continue through year-end. The Fed would definitely like to pause but I don’t think it will be able to.”
By Christopher Swann and Krishna Guha in Washington and Jennifer Hughes in New York
Published: June 14 2006 13:33 | Last updated: June 14 2006 23:48. 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 last month, taking the annual rate to 2.4 per cent.
The figures heighten the dilemma for the Federal Reserve, which may feel forced to continue to raise rates in spite of growing signs that the economy is slowing.
The futures market on Wednesday priced in a near 100 per cent certainty that the Fed would raise interest rates to 5.25 per cent this month, and doubled the chance, to 44 per cent, of another rise in August.
The Fed’s beige book of economic activity reported widespread business concern about high or rising costs, and added “just three districts, Boston, Dallas and Philadelphia, reported that retailers are having success raising retail prices”.
The stock market absorbed the news calmly, with the S&P 500 index rising 0.5 per cent.
However, Treasury bonds fell sharply. Yields on two-year Treasuries rose almost 10 basis points to 5.11 per cent, the highest since December 2000. The yield curve inverted further, suggesting the market thinks it increasingly likely that more rate rises will slow the economy.
President George W. Bush told reporters “the Fed is watching inflation very carefully…that’s Ben Bernanke’s job.”
Mr Bernanke, the Fed chairman, will on Thursday give what is expected to be an important speech on the economy.
The May inflation rise pushed the three-month annualised rate of core inflation 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. Such a move would increase the likelihood of a hard landing next year, he said.
The rise was driven by a rapid increase in “owners’ equivalent rent” – an estimate of the cost of living in your own home, based on what it would cost to rent a similar property. This was due to a technical adjustment and a pick-up in rents as high prices and a cooling-off of house price inflation encouraged more Americans to rent rather than buy.
Excluding this element, the core inflation rate was in line with market forecasts. Headline inflation, including energy costs, rose 0.4 per cent, boosted by a 4.9 per cent increase in petrol prices. There was some evidence higher energy prices were being passed on, with air fares rising 2.6 per cent over the month.
Mickey Levy, chief economist at Bank of America, said: “There has been a clear upward drift in inflation and it is going to continue through year-end. The Fed would definitely like to pause but I don’t think it will be able to.”
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