Consumer sentiment in US rises but inflation tumbles

A key index of US consumer sentiment surpassed expectations yesterday, boosting economists' hopes that economic growth will eventually pick up.

However, inflation for the US consumer dipped to its lowest level since 1966, further fuelling the intensifying debate over deflation risks.

The University of Michigan said its index of consumer sentiment jumped in May to 93.2 - its biggest gain in a year - from 86.0 in April. The new reading reflects consumer optimism about the future following the swift victory in Iraq and the post-war rebound in US stock prices.

The surge in the overall sentiment figure stemmed from a sharp rise in expectations.

But the other major component of the index suggested the economy currently remains weak.

That measure of current conditions fell to a preliminary 94.1 in May from April's sharp gain to 96.4.

But speculation of deflation mounted with the release of the US Labor Department's report that its consumer price index (CPI), excluding food and energy, had slowed to 1.6 per cent - its lowest rate since 1966.

Most economists dismiss talk of a Japan-style deflation - a vicious cycle of falling prices, profits, payrolls and purchases and worsening debt burdens - as very unlikely.

But in its last official policy statement, the US Federal Reserve made a new distinction between what it perceived as risks to growth and inflation, suggesting that it might act to stop what it considers a "minor" risk of a slowdown in inflation, even if economic growth improved.

Meanwhile, continental European countries and Japan are expected to come under pressure from the US and Britain to press ahead with economic reform at today's meeting of finance ministers from the leading developed economies at Deauville in France.

The ministers of the Group of Seven countries are expected to highlight some grounds for optimism about the global economic outlook.

Figures this week, which show zero growth in the Japanese and euro-zone economies in the first quarter, and recession in Germany, have battered hopes that the end of the war in Iraq could herald a return to strong global growth.

A record drop in energy prices drove euro-zone inflation down towards the European Central Bank's (ECB's) 2 per cent goal in April, reinforcing financial market expectations that interest rate cuts could be in the offing.

However, Irish inflation remains stubbornly high at 4.6 per cent, compared with the average for the euro-zone economies of 2.1 per cent.

Also this week, a report showed the euro-zone economy had stagnated in the first quarter and there was easing pressure on the ECB, which recently said it viewed price stability as inflation close to, rather than below, 2 per cent.

Consumer prices rose by a smaller-than-expected 0.1 per cent from the previous month and at the same annual rate of 2.1 per cent earlier estimated by Eurostat. - (Financial Times Service, Reuters)