US inflation figures outstrip forecasts

The latest read-out on US inflation showed prices rising at their fastest pace in over a year in the world's largest economy, but there were few signs that surging food, energy and other commodity costs were yet being passed on to consumers.

The Commerce Department's inflation data for January was released amidst intense debate on the future path for consumer prices, and some of the figures came in higher than forecast. However, financial markets responded by pushing down interest rates on US Treasuries, reducing the likelihood of an inflation-fighting interest rate rise.

The annual rate of core inflation, which excludes volatile food and energy costs, stood at 1 per cent in January, up from 0.8 per cent the previous month. Adding in food and energy, the headline inflation rate was 1.6 per cent.

The Federal Reserve instituted a $600bn quantitative easing (QE) programme last year – creating new money to buy US Treasuries – in an attempt to head off deflation and a new economic slump. The central bank has an informal target of a 2 per cent annual rate for core inflation.

The QE programme has been heavily criticised by conservatives, who claim it could lead inflation to run out of control. The Fed, though, says there are few inflationary pressures in an economy where unemployment is still running at 9 per cent.

In yesterday's figures, attention focused on a 0.2 per cent month-on-month gain in core inflation in January, which was double the average of economists' forecasts.

Rising clothing costs accounted for a large part of the gain, rising 1 per cent just since December. Economists remained largely sanguine about the figure, which several said had more to do with fewer discounts for January shoppers than it did with the global commodities markets. "The annual headline inflation rate edged up only a little in January, from 1.5 per cent to 1.6 per cent, but it will climb to around 2.5 per cent by mid-year, as the 85 per cent surge in agricultural commodity prices since mid-2010 really hits," said Paul Ashworth, chief US economist at Capital Economics.

"Nevertheless, with the unemployment rate still at 9 per cent, there will be plenty of downward pressure on underlying prices and so we don't expect core inflation to trend upwards."