US CPI points to a soft inflation, helps give Fed rate room

Reuters/WashingtonUS consumer prices were flat in December, pointing to muted inflation pressures that should help give the Federal Reserve room to prop up the economy by staying on its ultra-easy monetary policy path.Other data yesterday suggested the economy continued to grow moderately, with industrial production rising for a second straight month in December after output was held down by a storm in October.The Labor Department said its Consumer Price Index was unchanged last month, held back by a drop in gasoline prices. The reading was in line with analysts’ expectations in a Reuters poll.Last month, the Fed said it would keep interest rates near zero at least until the jobless rate falls to 6.5%, as long as the central bank believes inflation will stay below 2.5%.Yesterday’s data reinforced the view that inflation will not hit the Fed’s threshold anytime soon.“This leaves Ben Bernanke and the Fed with a free hand to continue with ultra-accommodative monetary policy.” said Michael Woolfolk, a currency strategist at BNY Mellon in New York.A separate report from the Fed showed industrial output rose 0.3% last month, with a pick-up in automobile production accounting for the bulk of the gain.The increase in industrial output was in line with economists’ expectations and followed a 1% advance in November. For the fourth quarter, industrial production rose at a 1% annual pace.The report supported views that the sector, which carried the economy’s recovery from the 2007-09 recession, was not heading for a hard landing.US financial markets were little moved by the data.. To boost growth and get Americans back to work in the wake of the Great Recession, the Fed has kept interest rates near zero since late 2008 and has bought some $2.5tn in assets. Some economists think steady improvement in the labour market could at least lead the Fed to curtail its asset-buying programme by the end of this year.Weak inflation helped consumers increase their purchasing power last month. Inflation-adjusted weekly earnings rose 0.6%, the Labor Department said in a separate report.Gasoline prices fell 2.3%, marking the third straight monthly decline.Away from gasoline and food, the cost of apparel fell 0.1%. New motor vehicle prices were flat.Prices for used cars and trucks fell 0.4%, declining for a sixth straight month. Housing costs edged up, with owners’ equivalent rent of primary residences rising 0.1%.The Fed does not use CPI to target inflation, and instead uses an index released by the Commerce Department. The two indexes usually track one another quite closely.By either measure, annual inflation remains below the Fed’s 2% target.In the 12 months to December the CPI increased 1.7%, the smallest increase since August. That compared to November’s 1.8% rise.“This supports the Fed’s contention that inflation is mild and that inflation expectations should be stable,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.A measure of underlying inflation, which strips out volatile food and energy prices, edged up 0.1% in December, slightly less than expected.In the 12 months to December, core CPI increased 1.9% after rising 1.9% in November.The Fed’s efforts to lower interest rates are helping many Americans buy homes, and housing is expected to provide a substantial boost to the economy this year.The Mortgage Bankers Association said applications for US home mortgages rose last week, the second straight week of gains.