Slowing U.S. Consumer Inflation May Sow Fed Doubt on Prices
A greater-than-expected deceleration in U.S. consumer-price inflation in May could give some pause to Federal Reserve officials as they consider further interest-rate increases, Labor Department figures showed Wednesday.
HIGHLIGHTS OF CPI
- Consumer-price index fell 0.1% m/m (est. unchanged) following 0.2% rise in prior month
- CPI up 1.9% y/y (est. 2%) after 2.2%
- Excluding volatile food and fuel, costs rose 0.1% m/m (est. 0.2%) after 0.1% rise; up 1.7% y/y, lowest since May 2015 (est. 1.9%)
While the data can be volatile month to month, often depending on energy and food prices, the underlying measure of inflation has slowed to 1.7 percent from 2.3 percent in January, raising the risk that price gains will drift further from the Federal Reserve’s target. The decrease in the headline index was led by energy — including the biggest drop in gasoline since February 2016 — though prices also fell in apparel, airfares, communication and medical-care services. Fed officials primarily judge their progress on meeting their target via a separate index, which has fallen below 2 percent since meeting that objective in February for the first time in almost five years. Central bankers conclude a two-day meeting in Washington later Wednesday, where they are widely expected to raise the benchmark interest rate for the second time this year amid a tightening labour market. Additional hikes, however, may be contingent on a rebound in underlying inflation.
China’s economy holds up in May but slowing investment points to cooling
China’s economy generally remained on solid footing in May, but tighter monetary policy, a cooling housing market and slowing investment reinforced views that it will gradually lose momentum in coming months. Still, with half a year left to go, Beijing is expected to handily meet its annual 6.5 percent economic growth target without too many bumps, good news for President Xi Jinping ahead of a major political leadership reshuffle later this year. China’s fast start to the year led the International Monetary Fund on Wednesday to raise its 2017 growth outlook for the country to 6.7 percent from its 6.6 percent forecast in April, though it recommended China accelerate reforms and rein in credit. Credit and money supply data on Wednesday showed China may be making progress in the battle against risky lending and rising leverage as May bank loans topped expectations but money supply grew at the slowest annual rate in over 20 years, which the central bank attributed to deleveraging. Off-balance sheet lending, or shadow banking activity, also fell sharply in May after rising earlier in the year.
ECB shifts some reserves to yuan from U.S. dollars
The European Central Bank has switched 500 million euros worth of its U.S. dollar reserves to yuan, reflecting the increased use of the Chinese currency and Beijing’s importance as one of the euro area’s largest trading partners, it said on Tuesday. “The ECB sold a small portion of its US dollar holdings, which remain the largest portfolio, leaving the overall size of the ECB’s foreign reserves unchanged. “The ECB’s foreign reserves now comprise US dollars, Japanese yen, Chinese renminbi, gold and SDRs. The investment also came after the IMF determined the yuan to be a freely usable currency and approved its inclusion in the Special Drawing Right (SDR) basket as the fifth currency, alongside the U.S. dollar, the euro, the Japanese yen and the British pound, the ECB said.