Higher Core Inflation Below Forecast

Posted 31 August 2006 @ 06:17 pm EET     Print     Reprint     E-Mail     Comments

NEW YORK (Reuters) - The Federal Reserve's favored gauge of U.S. inflation rose less than expected in July, while a measure of Midwest business activity showed slower growth in August, according to reports on Thursday that suggested the U.S. central bank does not need to raise interest rates soon.

Within the Midwest manufacturing report, Kingsbury International, a partner of NAPM Chicago which puts out The National Association of Purchasing Management-Chicago business barometer, said "the U.S. economy could be in a recession at this time."

The NAPM Chicago business barometer slipped to 57.1 in August from 57.9 in July and compared with economists' median forecast for a 57.0 reading. A reading above 50 indicates expansion.

Amid a deluge of economic data on Thursday, the highlight for investors was some government data on inflation. This showed core consumer prices rose a less-than-expected 0.1 percent in July, but the year-on-year rate of nonfood, nonenergy inflation remained at 2.4 percent, the highest since September 2002.

Analysts polled by Reuters were expecting a 0.2 percent gain in the core personal consumption expenditure index. The rate of inflation is a key factor in Federal Reserve thinking on whether to continue to pause in its campaign of interest rate hikes.

The inflation data on Thursday was weak enough to suggest the central bank will keep rates steady at its next policy-setting meeting on September 20.

"This is another reason to not increase," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston.

Markets largely shrugged off the data, with U.S. Treasury debt prices unchanged to slightly higher, while U.S. stocks were relatively flat. The dollar was trading higher against the euro.

Also on Thursday, the Commerce Department said new orders at U.S. factories fell by a smaller-than-expected 0.6 percent in July, lead by sharp declines in orders for transportation and defense goods.

Wall Street analysts polled by Reuters were expecting a 1.0 percent decline in factory orders. After stripping out transportation, factory orders increased 1.1 percent in July.

The government also said the number of Americans filing new claims for jobless benefits edged down by 2,000 last week, in a report showing stability in the pace of layoffs.

The Labor Department said 316,000 unemployed workers filed initial claims for state unemployment aid in the week ended August 26, off from a revised 318,000 in the prior week. Wall Street economists had expected claims to edge up to 315,000 from the 313,000 originally reported for the week ended August 19.

Meanwhile, New York City companies reported business conditions improved in August but were slightly less optimistic about current and future business conditions, according to the National Association of Purchasing Management-New York.

The NAPM New York index of local business activity rose to 416.8 in August, up from 409.3 in July. The index has been rising since November.