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US core inflation slows, puts spotlight on 2018 rate outlook

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WASHINGTON: Underlying US consumer inflation slowed in November, held down by weak healthcare costs and the biggest drop in apparel prices in nearly two decades, which could impact the pace at which the Federal Reserve raises interest rates next year.


Inflation has moderated for much of this year, leading to concern among some Fed officials that the factors holding back price pressures could prove more persistent. The US central bank on Wednesday increased borrowing costs for a third time this year, encouraged by a tightening labour market and strengthening economy. It forecast three rate hikes in 2018.


“The lack of a sustained pickup in core CPI does make the Fed deliberations about the pace of monetary policy tightening next year more complicated,” said Kathy Bostjancic, head of US macro investor services at Oxford Economics in New York. The Labour Department said its Consumer Price Index excluding the volatile food and energy components ticked up 0.1 per cent also as prices for airline fares and household furnishing fell. The so-called core CPI advanced 0.2 per cent in October. As a result, the annual increase in the core CPI slowed to 1.7 per cent in November from 1.8 per cent in October.


The Fed has a 2 per cent inflation target. The central bank’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, has consistently undershot its target for almost 5½ years.


The overall CPI increased 0.4 per cent in November after edging up 0.1 per cent in October. That raised the year-on-year increase in the CPI to 2.2 per cent from 2.0 per cent in October.


Prices for US Treasuries rose on the core CPI data and the Fed’s interest rate decision, while the dollar fell against a basket of currencies. Stocks on Wall Street were trading higher.


Economists believe inflation will rise next year after Republicans in the US Congress approved plans for sweeping tax cuts, including slashing the corporate income tax rate to about 20 per cent from 35 per cent. The fiscal stimulus will come at a time when the economy is almost at full employment.


“This expectation supports our forecast for the Fed to raise its policy rate four times next year after increasing it today,” said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets in New York. — Reuters


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