U.S. inflation on the rise, labor market tightening

WNM | Jul 11, 2019 at 3:25 PM

WASHINGTON, July 11 (Reuters) - U.S. underlying consumer prices increased by the most in nearly 1-1/2 years in June amid solid gains in the costs of a range of goods and services, but that will likely not change expectations the Federal Reserve will cut interest rates this month.

Signs of a pick-up in underlying inflation, together with a strong labor market could, however, temper expectations that the Fed will lower borrowing costs at least twice this year.

A rate cut at the July 30-31 policy meeting, the first in a decade, is almost certain after Fed Chairman Jerome Powell on Wednesday told lawmakers the U.S. central bank would "act as appropriate" to protect the economy from rising risks such as trade tensions and slowing global growth.

The Labor Department said on Thursday its consumer price index excluding the volatile food and energy components rose 0.3% last month. That as the largest increase since January 2018 and followed four straight monthly gains of 0.1%.

The so-called core CPI was boosted by strong gains in prices for apparel, used cars and trucks, as well as household furnishings. There were also increases in the cost of healthcare and rents. In the 12 months through June, the core CPI climbed 2.1% after advancing 2.0% in May.

But the overall CPI edged up 0.1% last month, held back by cheaper gasoline and food prices, matching May's rise. It increased 1.6% year-on-year in June after rising 1.8% in May.

Economists polled by Reuters had forecast the CPI unchanged in June and the core CPI gaining 0.2%.

The Fed, which has a 2% inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index increased 1.5% year-on-year in May and has undershot its target this year.

The Fed last month downgraded its inflation projection for 2019 to 1.5% from the 1.8% projected in March. Powell on Wednesday said "there is a risk that weak inflation will be even more persistent than we currently anticipate."

STRONG LABOR MARKET

In another report on Thursday, the Labor Department said initial claims for state unemployment benefits declined 13,000 to a seasonally adjusted 209,000 for the week ended July 6, the lowest level since April. Economists polled by Reuters had forecast claims rising to 223,000 in the latest week.

The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 3,250 to 219,250 last week.

Sustained labor market strength could help support the economy, which is also slowing as last year's massive stimulus from tax cuts and more government spending fades. Manufacturing is struggling, the trade deficit is widening again, consumer spending is rising moderately and the housing sector remains mired in a soft patch.

Despite the rising risks to the 10-year old economic expansion, the longest in history, the labor market remains healthy. The economy created 224,000 job in June. The tightening labor market has, however, not generated robust wage gains. This has helped to keep inflation moderate.

The dollar trimmed losses against a basket of currencies after the data, while U.S. Treasury prices fell. U.S. stock index futures pared gains.

In June, owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.3%, matching May's gain. The rent index shot up 0.4%. Healthcare costs increased 0.3%, after a similar advance in May. There was a 1.1% surge in the cost of dental services, but prescription drug prices fell 0.6%.

Apparel prices jumped 1.1% after being unchanged in May. Prices for these goods tumbled in March and April after the government introduced a new method and data to calculate their cost. Used motor vehicles and trucks prices accelerated 1.6% in June after declining for four straight months.

The price of household furnishings and operations rose 0.8%, the biggest gain since 1991, driven by rising costs for gardening and lawn care services. There were also increases in the costs of motor vehicle insurance, education, new vehicles, communication and alcohol.

But consumers paid less for gasoline last month, with prices dropping 3.6% after falling 0.5% in May. Food prices were unchanged last month after rebounding 0.3% in May. Food consumed at home fell 0.2% amid declines in the prices for beef, fish, eggs, cereals and fruit and vegetables.