US consumer price inflation at its lowest for a decade

THE annual rate of US consumer price inflation fell to its lowest in a decade last month the latest sign the economy is still on a path of robust growth with little inflationary pressure.

The consumer price index inched up by a seasonally adjusted 0.1 per cent in May, leaving prices 2.2 per cent higher than a year earlier, the Labour Department reported yesterday.

A sharp fall in fuel costs was the main factor behind the weakness in overall price rises. But even excluding the volatile food and energy components, the core index, rose by just 0.2 per cent last month, taking price rises to an annual rate of 2.5 per cent. Unadjusted for seasonal fluctuations, the core rate in May stood at its lowest level in 31 years.

The core rate of inflation has now been at or below 3 per cent for the past two years, a period when the US economy has been expanding at a generally healthy pace. This combination of growth without inflation has been the main reason for a sharp rise in stock prices over that time, as investors have concluded the US has entered an era of stable non-inflationary growth.

Analysts interpreted the figures as strengthening the case for the Federal Reserve to leave interest rates unchanged at the July 1st and 2nd meeting of its policy-making open market committee.

"The US continues to enjoy inflationless growth," said Mr Bruce Steinberg, chief economist at Merrill Lynch, the New York investment bank. "The data reinforce the likelihood the Fed will remain on hold."

The weakness of consumer prices has been underpinned in recent months by sharp falls in producer prices. Last week, the Commerce Department reported producer prices rose by just 0.3 per cent in the year to May, suggesting inflation in the production pipeline has all but disappeared. Those figures point to a further fall in the future rate of consumer price inflation.

The benign inflation figures helped stock prices rise slightly yesterday.

The Commerce Department also reported housing starts fell last month by 4.8 per cent after declines in March and April the first run of three straight falls in two years. But industrial production remained robust, the Fed reported, with an increase of 0.4 per cent last month. Industry's rate of capacity use rose further to 83.7 per cent, its highest since September 1995.

The overall rate of economic growth seems to be slowing, however, after the torrid pace of the first three months of the year. Earlier reports indicated retail sales fell sharply in April and May, and housing market activity was subdued.

This slowdown represents a near-perfect state for the economy. Overall output in the second quarter of 1997 is expected to have slowed to an annual rate of about 2.5 per cent, in line with the non-inflationary potential growth rate of the economy and down sharply from the first quarter's 5.8 per cent.

That deceleration is precisely what the Fed had been looking for when it failed to raise rates at its last open market committee meeting last month.