US inflation gauge eases, Midwest activity grows

A closely watched gauge of US consumer inflation fell in May to its slowest annual pace in three years, while Midwest business activity kept expanding in June at a healthy clip, reports on Friday showed. In a separate report, a Reuters/University of Michigan survey showed consumer sentiment improved slightly in June from earlier in the month as gasoline prices ebbed.
Even so, the final June reading was the lowest since last August. Taken together, the reports suggested the Federal Reserve was succeeding in controlling price pressures while fostering moderate economic growth. They came a day after Fed policy-makers said they were leaving the benchmark interest rate at 5.25 percent, where it has stood for the past year.
The Commerce Department's "core" personal consumption expenditures price index, which removes food and energy costs, rose 1.9 percent in May from a year earlier for its smallest annual rise since March 2004.
On a month-to-month basis, overall prices rose a stiff 0.5 percent in May, but core prices edged up just 0.1 percent. The core inflation reading is "a dip into their comfort zone, and if it's sustainable going forward, I think it suggests the Fed is not in a position to raise rates any time this year," said John Silva, chief economist at Wachovia Securities in Charlotte, North Carolina.
After this week's policy meeting, Fed officials acknowledged that inflation had eased but stressed that higher prices are still a top concern. US stocks rose on the data, with the Dow Jones industrial average up 13.17 points, or 0.10 percent, at 13,435.45. It hit a session peak at 13,524.54 earlier.
Treasury debt prices also edged higher on the tame inflation data, but the dollar lost ground to the euro. A separate report showed a rush of new orders kept Midwest factory activity growing rapidly in June, albeit at a slightly slower pace than in May, suggesting the US economy remains robust.
The National Association of Purchasing Management-Chicago business barometer came in at 60.2 in June, down from 61.7 in May but above economists' forecasts of 58.0. A reading above 50 indicates expansion. The report was "consistent with solid manufacturing expansion," said David Sloan, analyst at 4CAST Ltd in New York.
The Commerce Department report also showed consumers boosted spending in May by 0.5 percent for the second straight month. That was less than Wall Street had expected and hinted that more sedate spending habits may keep a lid on prices. Incomes rose by 0.4 percent, also less than expected.
The Reuters/University of Michigan survey showed a final June reading of 85.3 reading, below 88.3 in May and its lowest since August 2006. Consumer sentiment is proxy for future consumer spending, which accounts for two-thirds of the US economy.