Confusion over US interest rates

Mixed signals on the US economy yesterday left analysts unsure about whether or not the Federal Reserve will raise interest rates when its Open Markets Committee meets next week. Consumer prices increased by only 0.1 per cent last month, but the underlying increase was a bigger than expected 0.3 per cent. Higher prices for clothing, health care and housing were behind the rise, which took the core inflation rate up to 2.7 per cent from 2.5 per cent in March. The headline inflation rate dropped to 2.5 per cent from 2.8 per cent because of a decline in energy prices.

Against the slightly disappointing inflation figures, industrial output was unchanged in April, following big rises in February and March. The rate of capacity use, a figure monitored closely by the Fed, fell slightly to 83.4 per cent. However, the Fed said a strike caused more than half of a 6.8 per cent fall in car and truck manufacture in April. Excluding motor vehicles, output was up 0.3 per cent compared to a 0.6 per cent increase in March.

"The key to next week's decision is the Fed's view of the likely pace of growth in the second half of the year," said Ian Shepherdson, an analyst at HSBC Markets in New York.