US rate fears ease on prices news

BY DIANE COYLE

Economics Correspondent

Consumer prices in the US rose less than expected last month, bringing more hope that the economy will glide into a soft landing without the need for an eighth increase in interest rates.

Lower energy prices and unchanged food prices helped keep the increase in the consumer price index down to 0.2 per cent in March. The annual rate of inflation retreated to 2.9 per cent.

Fresh fruit and vegetable prices tumbled 2.8 per cent, although a US Labor Department economist warned that the Californian floods could affect food prices in April. The ``core'' index, excluding food and energy, was up 0.3 per cent in the month.

The price of services, which make up more than half the index, rose by a troubling 0.4 per cent. Medical and transportation servicessaw the biggest jumps.

The biggest price rise of all in March was in consumer finance costs, but this was due simply to past interest rate increases. The second-biggest rise was used car prices, because belt-tightening Americans are switching from new cars to used cars. They cost an average 31.5 per cent more than they did a year ago.

Lacy Hunt, chief economist at HSBC Markets in New York, said: ``There is no significant inflationary pressure and no reason to expect any.'' He argued that consumer demand was weak and wage rises would stay modest.

Anecdotal evidence on the scale of pre-Easter promotional sales supports this assessment. Clothing prices fell in March because of price discounting.

The financial markets shared the view that inflation will decline further, with Treasury bonds making modest gains on the announcement of the news.

The Federal Reserve's policy committee meets on 23 May and 5-6 July. The Wall Street consensus has swung towards no further move on rates until July thanks to the good news on both consumer and factory gate prices prices this week.