Inflation figures may pave the way for Fed to start ‘taper’ plan

The cost of living in the US increased less than expected in August, but still pointed to a stabilisation in underlying inflation that could pave the way for the Federal Reserve to start pulling back its bond-buying programme.

The labour department’s consumer price index ticked 0.1 per cent higher, in line with expectations, following a 0.2 per cent rise in July. Core prices, which exclude the volatile food and energy components, also edged 0.1 per cent higher in August, shy of consensus forecasts of 0.2 per cent.

The numbers will be closely watched as the Fed has made a stabilisation and then a pick-up in inflation one part of the scenario on which it will start to slow its asset purchases from $85 billion a month. The central bank was meeting yesterday and does so again today to discuss whether the economy is strong enough to begin the so-called “taper”.

At his news conference in June, Fed chairman Ben Bernanke said that one part of his tapering scenario – which would see asset purchases slow to a halt by mid-2014 – was that the Fed saw "inflation moving back toward our 2 per cent objective over time".

Consumer prices overall rose 1.5 per cent in the year to August after a 2 per cent year-over-year gain in the previous month. Core prices climbed 1.8 per cent from August 2012, following a 1.7 per cent advance in the prior 12-month period.

The month-on-month rise in core prices, an indicator of current inflationary pressures, remained weak but showed little sign of a new trend downwards. That may be enough for the Fed to go ahead with a taper.

"We doubt that the fall in CPI inflation in August will prevent the Fed from announcing a tapering of its asset purchases at the conclusion of its two-day policy meeting," noted Paul Dales, senior US economist at Capital Economics. "Indeed, the risk of a period of very low core inflation has passed."

James Knightley, an economist at ING, said: "Given the improvements seen in the labour market and the encouraging signs in lead indicators . . . we look for the Fed to start the taper tomorrow with $5 billion per month off both treasury and mortgage-backed security purchases." – (Copyright The Financial Times Limited 2013)