Tame US inflation backs Fed spending plan (AFP)

WASHINGTON (AFP) – US consumer prices barely budged in November in a surprise easing of inflation that backs the Federal Reserve’s decision to inject 600 billion dollars into the flagging economy.

The Labor Department reported its consumer price index rose a mere 0.1 percent. Economists had expected it would match October’s gain of 0.2 percent.

The moderation in inflation was due in part to energy prices, which increased only 0.2 percent, the smallest rise since June, after surging 2.6 percent in October.

“Headline prices rose modestly as slower inflation in energy prices dulled the impact of a bigger jump in food prices. More notably, core inflation finally returned to positive territory after a three-month hiatus,” said Arijit Dutta at Moody’s Analytics.

On an annual basis, CPI was up 1.1 percent from November 2009.

Excluding food and energy prices, which can be volatile month-to-month, so-called “core” CPI increased 0.1 percent, as expected, after three months of flat readings.

Core inflation, however, increased on an annual basis to 0.8 percent after a record low increase in October.

The increase in core prices was seen as a welcome sign that deflation risks were receding, analysts said.

Moody’s Dutta said data suggest a more gradual acceleration in headline inflation than was anticipated a few months ago before the recovery hit a soft patch, but overall prices were expected to rise in the coming months and approach a more normal 2.5 percent to 3.0 percent range by 2012.

Peter Newland at Barclays Capital said the rebound in the year-on-year inflation rate “should also ease fears of further disinflation.”

The November data provided “further evidence that the period of disinflation has largely run its course, with small increases across most core components.”

The numbers confirmed that inflation remained far below the Federal Reserve’s outlook for longer-term price stability. The central bank has an unofficial inflation target of around 2.0 percent.

The Fed on Tuesday stuck to its plan to spend 600 billion dollars in quantitative easing through June and held interest rates near zero for a second year in hopes of reducing high unemployment and supporting prices.

The Fed is worried that the current environment of extremely low inflation could lead to deflation, a dangerous downward spiral of prices and wages that is difficult to exit.

Inna Mufteeva at Natixis warned of slightly increasing disinflationary risks lurking in the world’s largest economy due to the ailing labor market, where unemployment has remained stuck near 10 percent.

“We expect the slight downward (inflation) trend to continue in the coming months as domestic disinflationary pressures coming from the labor market persist,” the analyst said.

“Despite the generally more optimistic outlook for the growth in our scenario the fears of deflation still dominate the inflationary ones in the short and medium term as the resource slack remains significant.”

The wage numbers released separately by the Labor Department showed real average hourly earnings fell 0.1 percent from October to November due to the 0.1 percent increase in the CPI.

“Over the past six months, real average weekly earnings has changed little,” the department said.

The breaking news, Tame US inflation backs Fed spending plan
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