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Last Updated: Tuesday, 17 June, 2003, 14:20 GMT 15:20 UK
US prices ease deflation fears
US consumer
Rising living costs helped push up US inflation in May, allaying fears that the economy could slip into deflation.

Consumer prices, excluding volatile food and energy prices, advanced 0.3% in May, the fastest rate in nine months.

The US Labour Department's Consumer Price Index (CPI) showed rental costs and house prices helped push prices in the core index to their biggest gains since August last year, following no change during March and April.

"The CPI report showed that inflation clearly isn't dead," said David Littman, chief economist at Comerica Bank.

Mr Littman suggested the stronger-than-expected figures could mean an anticipated interest rate cut may not materialise.

"This should convince them [the Federal Reserve] that the wise move is to hold off, and that all this talk about deflation is just that -talk."

Hotel rises

Last month's CPI suggested the core inflation rate had slipped to its lowest level in 37 years, prompting fears that the US economy would spiral into deflation.

Hotel rates, which were depressed when no one was travelling during the Iraqi war and because of Sars, have bounced back.
Kevin Logan, Dresdner Kleinwort Wasserstein

But the Labour Department's latest figures indicated May's upturn had helped pull the underlying 12 month inflation rate to 1.6%, from 1.5% in April.

The department attributed much of the rise to a 4.1% rise in lodging costs - the biggest jump since its records began in 1997.

"Lodging away from home was up 4%," said Kevin Logan, chief economist at Dresdner Kleinwort Wasserstein.

"Hotel rates, which were depressed when no one was travelling during the Iraqi war and because of Sars, have bounced back. That's where most of it came from."

Fuel falls

The Fed should continue to worry about the threat of deflation and we fully expect it will cut rates again next week
Paul Ashworth, Capital Economics

Falling energy costs help keep overall prices level.

Gasoline prices plummeted by 6.8% in May and fuel oil by 6.3% as the price rises seen during a conflict in Iraq subsided.

Analysts said even the flat inflation rate when taking into account fuel and food prices was relatively good news.

"Energy prices definitely cut into the headline figure, but unchanged is definitely a little bit higher than the market was expecting," said Andrew Delano, a currency strategist at Ideaglobal in New York.

Nonetheless, a month of better-than-expected data did little to convince some economists.

Paul Ashworth at Capital Economics said:

"We still believe that the trend in inflation is downwards.

"Therefore, the Fed [Federal Reserve] should continue to worry about the threat of deflation and we fully expect it will cut rates again next week."


SEE ALSO:
US 'set for more job losses'
17 Jun 03  |  Business



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