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Modest rise in U.S. consumer prices may delay Fed rate hike

A price tag on a shirt at a T.J. Maxx store in Des Moines, Iowa, May 16, 2017.

Charlie Neibergall/AP

U.S. consumer prices rose slightly in July as higher food costs were partly offset by falling prices for a range of other goods, suggesting benign inflation that could persuade a cautious Federal Reserve to delay raising interest rates until December.

But with the labor market near full employment and economic growth accelerating, analysts expect the U.S. central bank will announce a plan to start unwinding its massive bond portfolio at its policy meeting next month.

"We believe the Fed will focus on the balance sheet in September, foregoing another rate hike until December," said James Bohnaker, an economist at IHS Markit in Lexington, Massachusetts. "The inflation outlook will not change drastically anytime soon."

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The Labor Department said on Friday its Consumer Price Index edged up 0.1 per cent last month after being unchanged in June. That lifted the year-on-year increase in the CPI to 1.7 per cent from 1.6 per cent in June.

Economists had forecast the CPI rising 0.2 per cent in July and climbing 1.8 per cent year-on-year.

Stripping out the volatile food and energy components, consumer prices gained 0.1 per cent for the fourth straight month. The so-called core CPI rose 1.7 per cent in the 12 months through July and has now increased by that margin for three consecutive months.

Despite the modest gain in consumer prices, which came on the heels of a drop in producer prices in July, many economists continue to share the Fed's conviction that transitory factors were holding back inflation.

Fed Chair Janet Yellen told lawmakers last month that "some special factors," including prices for mobile phone plans and prescription drugs, were partly responsible for the low inflation readings. Mobile phone prices continued to decline in July, falling 0.3 per cent.

Prices of U.S. government debt initially rose on the inflation data, but pared gains after Russian Foreign Minster Sergei Lavrov said there was a Russian-Chinese plan to defuse tensions between the United States and North Korea.

The dollar was trading lower against a basket of currencies, while U.S. stocks rose.

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The Fed has a 2 per cent inflation target and tracks a measure that has been stuck at 1.5 per cent since May.

Inflation remains tame despite a tightening labor market, a conundrum for the central bank as it contemplates tightening monetary policy further.

The Fed is expected to outline a program to start offloading its $4.2-trillion portfolio of Treasury bonds and mortgage-backed securities at its Sept. 19-20 policy meeting.

It is expected to raise interest rates in December, though such a move would depend on future inflation data. The Fed has raised borrowing costs twice this year.

"One-time factors that have slowed inflation will gradually dissipate," said Gus Faucher, chief economist at PNC Financial Services in Pittsburgh. "Stronger wage growth as businesses compete for scarce workers will also contribute to higher inflation in the second half of this year and in 2018."

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Food prices rose 0.2 per cent last month, driven by a surge in the cost of meat, fish, eggs, fruits and vegetables. Food prices were unchanged in June. The cost of food consumed at home increased 0.2 per cent.

Consumers also paid more for prescription drugs, whose prices jumped 1.3 per cent after increasing 1.0 per cent in June. Prices for apparel rose 0.3 per cent after four straight monthly declines. While gasoline prices were unchanged after tumbling 2.8 per cent in June, electricity prices rose 0.4 per cent.

Rental costs maintained their upward trend last month. Owners' equivalent rent of primary residence rose 0.3 per cent after advancing by the same margin in June.

The cost of new motor vehicles fell 0.5 per cent, the biggest drop since August 2009 and the sixth consecutive monthly decline, amid slumping demand.

Low inflation is a relief for many Americans who have seen their paychecks barely increase in recent years. In another report, the Labor Department said inflation-adjusted average hourly earnings increased 0.7 per cent in the 12 months through July, slowing from June's 0.9 per cent gain.

"The Fed may want inflation to pick up, but that would not be good news to households," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "The only way spending power has increased at all is that inflation has remained below the Fed's target rate."

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