US Inflation Weak, Market Calling for Fed to Cut Interest Rates

FLASH: US inflation was much weaker in Q-1 than thought on a sharp slowdown in domestic demand, which cast doubts on the Fed’s view that the benign price pressures were largely because of temporary factors.

The weak inflation pulse reported by the US Commerce Department Thursday pressures the Fed to cut interest rates, especially as the economy appeared to slow in Q-2.

The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased at a 1.0% rate last Quarter, the government said. The core PCE price index, which is the Fed’s preferred inflation measure, was previously wrongly reported to have risen at a 1.3% pace.

The increase last Quarter was the smallest in 4 years and pushed inflation further below the Fed’s 2% target. Inflation has been running below its target this year and President Trump has urged and continues to urge the Fed to cut rates.

The Fed early this month kept rates Unchanged and signaled little inclination to adjust monetary policy anytime soon. Inflation has been restrained in part by weaker prices for portfolio management services, apparel, and airfares.

“This raises the chances that tomorrow’s core PCE inflation rate prints at 1.5% on a year-over-year basis, which would potentially give the Fed more ammunition to worry about a low inflation rate,” said John Ryding, chief economist at RDQ Economics in New York.

The government will publish the April core PCE price index data Friday.S

The government also reported Thursday that GDP (gross domestic product) increased at a 3.1% annualized rate in the Q-1, pared from the 3.2% pace it estimated last month.

The economy will mark 10 years of expansion in July, the longest on record.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.2% rate in the January-March frame, up from a 1.3% growth pace in Q-4 Y 2018

In another report Thursday, the Commerce Department said exports fell 4.2% in April. The report added to weak April data on industrial production, orders for long-lasting manufactured goods, retail and home sales.

The economy is seen supported by a strong labor market, which is boasting the lowest unemployment rate in 50 years. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 215,000 for the week ended 25 May.

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