Weak Inflation Complicates Fed Rate Decision

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Consumer Price Index Rises For First Time Since October
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By Lucia Mutikani

WASHINGTON -- U.S. consumer prices unexpectedly fell in August as gasoline prices resumed their decline and a strong dollar curbed the cost of other goods, pointing to tame inflation that complicates the Federal Reserve's decision whether to hike interest rates.

The Labor Department said Wednesday its Consumer Price Index slipped 0.1 percent, the first drop since January, after edging up 0.1 percent in July. In the 12 months through August, the CPI rose 0.2 percent after a similar gain in July.

Signs of a disinflationary trend reasserting itself are in stark contrast with a fairly healthy economy and a rapidly tightening labor market, and highlight the dilemma Fed officials face as they contemplate raising interest rates for the first time in nearly a decade.

%VIRTUAL-pullquote-You can make a strong case either way for the Fed to begin raising interest rates or waiting.%The U.S. central bank's policy-setting committee was due to start a two-day meeting later Wednesday. While solid data on consumer spending, housing and employment have been supportive of a rate hike, the case for higher borrowing costs has been undermined by recent global financial markets turmoil.

"You can make a strong case either way for the Fed to begin raising interest rates or waiting," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"The prudent risk management approach would argue for them to hold off, but if the Fed was really data dependent there is a very a strong case to raise rates on Thursday."

U.S. financial markets were pricing a 29 percent probability of a lift-off in the Fed's benchmark overnight interest rate Thursday, little changed from before the data's release.

A Reuters survey of 80 economists showed 45 expected the U.S. central bank to keep its short-term interest rate near zero.

Stocks on Wall Street were trading higher in the wake of the soft CPI data. Prices for U.S. Treasuries rose marginally, while the dollar fell against a basket of currencies.

Tightening labor market conditions, marked by record high job openings and a 5.1 percent unemployment rate, have so far not spurred faster wage growth.

Sluggish wage gains and a strong dollar have contributed to keeping inflation below the Fed's 2 percent target. Economists had forecast the CPI unchanged in August and rising 0.2 percent from a year ago.

Dollar Dampening Inflation

The so-called core CPI, which strips out food and energy costs, ticked up 0.1 percent last month after a similar rise in July. The muted gains in the core CPI reflect the dollar's impact on the cost of imported goods.

The dollar has gained 17.1 percent against the currencies of the United States' main trading partners since June 2014.

In the 12 months through August, the core CPI increased 1.8 percent. It was the fifth time in six months that the 12-month change was 1.8 percent. The Fed tracks the personal consumption expenditures price index, excluding food and energy, which is running well below the core CPI.

"One thorn in the Fed's side is inflation. I don't think today's CPI number really advances the debate on whether we are any closer to getting to that 2 percent target that the Fed is clearly focused on," said Mike Moran, head of economic research for the Americas at Standard Chartered Bank in New York.

Last month, gasoline prices fell 4.1 percent, the biggest drop since January, after rising 0.9 percent in July. Gasoline prices had risen for three straight months. Food prices gained 0.2 percent as the cost of eggs increased 7.7 percent.

Egg prices are now up 35.3 percent from a year ago, following the avian flu that struck some parts of the country early in the year. There were increases in prices for tobacco and apparel. However, airline fares fell 3.1 percent and used car prices declined for a fourth straight month.

The rental index increased 0.3 percent last month, matching July's gain. Demand for rental accommodation is being driven by rising household formation as the sturdy labor market encourages young adults to leave their parental homes.

The hot rental market is helping to fuel home building activity, with a separate report Wednesday showing homebuilder confidence near a decade high in September.

9 Numbers That'll Tell You How the Economy's Really Doing
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Weak Inflation Complicates Fed Rate Decision
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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