Threat of US interest rate hikes recedes

The prospect of more US interest rate rises receded further yesterday as July inflation data showed price pressures continuing to ease.

The US Labor Department core consumer price index, which excludes the impact of volatile oil and food prices, rose by just 0.2 per cent in July compared with June, a slowing from the 0.3 per cent monthly increase recorded in each of the previous four months.

US bond prices soared for the second straight day as traders bet that interest rates will again be left steady when the Federal Reserve meets next month but, as they did, Richard Fisher, president of the Dallas Fed, struck a cautionary note over inflation.

Mr Fisher said while there was evidence that the economy was slowing, the problem was that the "inflation pressure gauge needle [ was] moving in the opposite direction".

The annual rate of core inflation was 2.7 per cent. Including food and energy products prices inflation eased to 4.2 per cent in July, compared with 4.3 per cent in June. The dollar weakened in response to the news as analysts predicted that the US Federal Reserve was now less likely to increase interest rates.

"This will certainly add fuel to the idea that the Fed will stop raising rates, because the housing industry is rapidly getting more weak," Michael Metz of Oppenheimer & Co said yesterday.

"Today's CPI reading for July might fall short of market expectations, and further reinforce the emerging consensus that the Fed has peaked," Niall Dunne, Ulster Bank financial market strategist, said yesterday.

Separate data indicated that US home construction fell last month to the lowest level in almost two years.

Last week the US Federal Reserve bank kept its key interest rate unchanged, halting a cycle of successive increases. Data showed the rate of US producer price inflation - the rate of increases of goods leaving factories - turning negative in July.

The slowing of consumer and wholesale price rises supports the view of the Federal Open Market Committee, the US interest rate setting body, that the economy is cooling.