Fed Expected to Raise Interest as Inflation Picks up

By Joyce Yu

U.S. inflation accelerated in May to the fastest pace in more than six years, lending more support to the Fed’s plan for gradual interest-rate hikes. U.S. stocks were traded in narrow range as this falls within market’s expectation.

The consumer price index rose 0.2% from the previous month and 2.8% from a year earlier, according data released by Labor Department report this morning. Excluding food and energy, the core gauge was up 0.2% from the prior month and 2.2% from May 2017. This is in line with estimates of economists who expect Fed will raise interest rates at its two-day meeting that starts later on Tuesday in Washington. The policy makers will also issue updated forecasts showing whether they expect one or two hikes in the second half.

A separate Labor Department report, however, sends a less upbeat message: average hourly wages, adjusted for inflation, were unchanged in May from a year earlier. For production and nonsupervisory workers, real average hourly earnings fell 0.1% from a year earlier.

The data “provide further evidence that inflation is moving towards the Fed’s objective,” and the central bank will continue on its gradual rate-hike path, Kevin Cummins, an economist at NatWest Markets, told the Bloomberg. The pay figures are “a reminder that you don’t need to necessarily get more aggressive in your approach because wages haven’t accelerated as much as they have in the past,” he said.

The May CPI showed solid gains could not be written off as the result of gasoline prices, cellphone-contract base effects or merely rent pressures, Bloomberg Economists Carl Riccadonna and Niraj Shah noted. “CPI service pressures exhibited a broad-based acceleration in most underlying categories, which is likely reflective of the ongoing pickup in labor costs.”

Beside rising interest rate, escalating trade tensions is also a potential threat to the global economy, the head of the International Monetary Fund has warned. “The biggest and darkest cloud that we see is the deterioration in confidence that is prompted by [the] attempt to challenge the way in which trade has been conducted, in which relationships have been handled and the way in which multilateral organizations have been operating,” IMF Managing Director Christine Lagarde said at a news conference in Berlin on Monday.

Her view is echoed by World Trade Organization Director-General Roberto Azevêdo who said at the same event that the rising tensions in global trade “risk a major economic impact, undermining the strongest sustainable period of trade growth since the financial crisis.”