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Core Inflation Stays Within Fed's Comfort Zone

The U.S. personal consumption expenditures price index, excluding food and energy, advanced by 1.9 percent in May from a year earlier, according to a government report on Friday that is likely to give the Federal Reserve some assurance it is making progress in its effort to curb inflation.

That was the lowest reading for the year-over-year core PCE price index, a closely watched inflation gauge, since a matching reading in March 2004, the Commerce Department said.

Also bolstering views on the economy was a stronger-than-expected report from National Association of Purchasing Management-Chicago. The group's index showed business activity in the U.S. Midwest expanded in June at a slightly slower, but still higher than expected pace.

The index eased to 60.2 from 61.7 in May. Prices paid fell to 68.1 from 70.2 and new orders slipped to 65.7 from 71.1.

The latest reading on inflation should provide some comfort to Federal Reserve policy-makers who on Thursday opted to hold interest rates steady but still cautioned that inflation was a key concern.

"It's a dip into their comfort zone and if it's sustainable going forward, I think it suggests that the Fed is not in a position to raise rates any time this year," said John Silvia, chief economist at Wachovia Securities in Charlotte, North Carolina.

Treasury prices extended gains after the data, while the dollar was little changed and U.S. stock index futures rose.

The core personal spending price index advanced by 0.1 percent from a month ago and that was exactly in line with economists' expectations. That was after the same advance a month earlier.

Personal income advanced by a lower-than-expected 0.4 percent in May after a 0.2 percent decrease in April that was revised from a 0.1 percent decrease. Economists were expecting a 0.6 percent gain.

Personal spending rose 0.5 percent in May, the same increase as in April. Economists had expected a 0.7 percent increase.

"It still seems that the consumer is steady as ever," Silvia said.

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