US inflation milder than expected
US inflation milder than expected
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: April 17 2007 17:59 | Last updated: April 17 2007 17:59
US inflation was milder than expected last month, according to figures that make the Federal Reserve more likely to keep interest rates on hold and triggered a fall in the dollar against major currencies.
Sterling soared - breaking through the $2 mark – while the greenback approached a record low against the euro.
The dollar weakened following the government report on Tuesday showing a slowdown in core inflation. Prices excluding volatile food and energy costs rose 0.1 per cent last month after a gain of 0.2 per cent in March.
The inflation slowdown suggests the central bank may find itself under less pressure to counter rising prices by raising rates and could give the central bank slightly greater flexibility to consider easing monetary policy in future.
Drew Matus, an economist at Lehman Brothers, said: “The inflation numbers give the Fed more breathing room.”
The central bank views inflation as a slightly greater threat to the US economy than the uncertain outlook for growth, but “this gives them a little more time to wait and see and let things develop,” said Mr Matus.
”Essentially, the data shows US medical care costs - the inflation demon of the moment - and women’s clothing costs reversed recent trends,” he added.
Economists said the more stable outlook for US interest rates had prompted speculative investors with an appetite for risk to shift their holding away from the dollar.
“People tend to want to invest in the currency that has higher interest rates so they get a better return. The data from the US showing more modest inflation and the UK showing higher inflation makes means the interest rate differential is likely to widen. The UK is more likely to raise rates while the notion of a US rate rise recedes,” the economist said.
Alan Ruskin, a currency strategist at RBS, said: “What we are seeing is those investors chasing risk moving to higher yielding currencies. These numbers reinforce an existing trend.”
“There had been persistent fears about inflation boxing in the Fed and making it difficult to respond to a slowdown in growth. Now the Fed is less boxed in,” he said.
The economist said the central bank was also more likely to keep rates on hold following separate figures on Tuesday showing resilience in the construction sector.
US homebuilders started work on more homes than expected as housing starts rose slightly to an annual pace of 1.518m units
Mr Matus added: “It seems the housing slowdown is playing out as expected and there are some grounds for optimism on inflation.”
Mr Ruskin said: “We could be falling back to a goldilocks economy of moderating inflation and moderate growth.”
US government debt prices rallied as investors priced in a lower likelihood of US rate cuts, sending the yield on the benchmark 10-year note down to of 4.71 per cent from 4.74 per cent.
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: April 17 2007 17:59 | Last updated: April 17 2007 17:59
US inflation was milder than expected last month, according to figures that make the Federal Reserve more likely to keep interest rates on hold and triggered a fall in the dollar against major currencies.
Sterling soared - breaking through the $2 mark – while the greenback approached a record low against the euro.
The dollar weakened following the government report on Tuesday showing a slowdown in core inflation. Prices excluding volatile food and energy costs rose 0.1 per cent last month after a gain of 0.2 per cent in March.
The inflation slowdown suggests the central bank may find itself under less pressure to counter rising prices by raising rates and could give the central bank slightly greater flexibility to consider easing monetary policy in future.
Drew Matus, an economist at Lehman Brothers, said: “The inflation numbers give the Fed more breathing room.”
The central bank views inflation as a slightly greater threat to the US economy than the uncertain outlook for growth, but “this gives them a little more time to wait and see and let things develop,” said Mr Matus.
”Essentially, the data shows US medical care costs - the inflation demon of the moment - and women’s clothing costs reversed recent trends,” he added.
Economists said the more stable outlook for US interest rates had prompted speculative investors with an appetite for risk to shift their holding away from the dollar.
“People tend to want to invest in the currency that has higher interest rates so they get a better return. The data from the US showing more modest inflation and the UK showing higher inflation makes means the interest rate differential is likely to widen. The UK is more likely to raise rates while the notion of a US rate rise recedes,” the economist said.
Alan Ruskin, a currency strategist at RBS, said: “What we are seeing is those investors chasing risk moving to higher yielding currencies. These numbers reinforce an existing trend.”
“There had been persistent fears about inflation boxing in the Fed and making it difficult to respond to a slowdown in growth. Now the Fed is less boxed in,” he said.
The economist said the central bank was also more likely to keep rates on hold following separate figures on Tuesday showing resilience in the construction sector.
US homebuilders started work on more homes than expected as housing starts rose slightly to an annual pace of 1.518m units
Mr Matus added: “It seems the housing slowdown is playing out as expected and there are some grounds for optimism on inflation.”
Mr Ruskin said: “We could be falling back to a goldilocks economy of moderating inflation and moderate growth.”
US government debt prices rallied as investors priced in a lower likelihood of US rate cuts, sending the yield on the benchmark 10-year note down to of 4.71 per cent from 4.74 per cent.
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