Surprise fall in US inflation provides relief for the Fed

The rising cost of food and fuel is not so far leading to a broader rise in inflation in the US, according to the latest figures.

In fact, the consumer price index for April showed the annual inflation rate ticked lower last month, confounding expectations and giving heart to officials at the Federal Reserve, which has predicted that weaker economic growth will help cool prices as the year progresses.

The year-on-year increase in consumer prices was 3.9 per cent, down from 4.0 per cent in March despite registering the fastest gain in food prices in 18 years. Core inflation, which strips out volatile food and energy prices and which is used by the Fed to guide interest rate policy, was 2.3 per cent in April.

The month-on-month increase in headline inflation was 0.2 per cent, when economists had an average forecast of 0.3 per cent, but a row broke out almost immediately over the accuracy of the figures.

In particular, because the US government adjusts the figures to strip out expected seasonal variations, there was consternation that petrol prices were registered showing no month-on-month rise at all.

"Using an overly aggressive seasonal adjustment factor, the statistical magicians turned an actual 6.5 per cent surge in gasoline prices into a small decline," analysts at PNC Financial Services wrote in a note to clients. "Can they read the minds of very sceptical American motorists who are not fooled by this statistical sleight of hand?"

With oil prices continuing to hover around all-time highs and food prices up 5.1 per cent compared with a year ago, members of the Federal Reserve's interest rate-setting committee have been highlighting inflation dangers in a co-ordinated series of speeches this week. After the Fed cut interest rates from 5.25 per cent to 2 per cent since September, to try to forestall a recession, some economists have warned that the Fed may be stoking inflation in the economy.

At the last meeting, and in speeches since, committee members have begun to signal that the period of monetary easing may be coming to a close.

The US stock market rallied on yesterday's better-than-expected inflation news, as investors cheered that the Fed will have greater room for manoeuvre.

Guy LeBas, economist at Janney Montgomery Scott, said: "This is the third consecutive month in which inflation has shown no signs of acceleration. It's getting progressively harder to ignore the fact that... the consumer price index numbers simply do not show any acceleration in inflation."

Other data out yesterday showed a 65 per cent increase in foreclosures.