NEW YORK (Reuters) - Inflation in May outside of food and energy posted its slowest annual gain in three years, suggesting the Federal Reserve is making progress in fighting inflation.
Consumer sentiment also held up in June, according to a separate report on Friday, while Midwest business activity continued to expand, albeit at a slower pace.
In a report released on Friday, the Commerce Department said it “core” personal consumption expenditures price index, which removes food and energy costs, rose 1.9 percent in May from a year ago, its smallest annual rise since March, 2004.
On a month-to-month basis, prices rose a stiff 0.5 percent in May but core prices edged up just 0.1 percent.
The Fed, which has held interest rates at 5.25 percent since June, acknowledged this week that inflation has eased but stressed that higher prices are still a top concern.
“It’s a dip into their comfort zone and if it’s sustainable going forward, I think it suggests the Fed is not in a position to raise rates any time this year,” said John Silva, chief economist at Wachovia Securities in Charlotte, North Carolina.
The report also showed consumers boosted spending in May by 0.5 percent, the same increase as in April, while incomes rose a lower-than-expected 0.4 percent.
In a separate report, the Reuters/University of Michigan survey of consumers showed sentiment improved slightly in June from earlier in the month as gasoline prices ebbed but was slightly below the level seen in late May.
The final June reading came in at 85.3, above a median forecast of 84.0 and the preliminary June reading of 83.7. The final May reading was 88.3.
“Despite all the turbulence in the market and worries about the job market, confidence is holding up,” said Gary Schlossberg, senior economist at Wells Fargo Capital Management in San Francisco.
Consumer sentiment has been a solid proxy on future consumer spending, which accounts for two-thirds of the U.S. economy.
Stocks rose, with the Dow Jones industrial average <.DJI> rising 0.72 percent to 13,520.56.
U.S. Treasury debt prices also edged higher on the tame inflation data, while the dollar lost ground to the euro and high-yielding currencies as investors looked for higher returns abroad.
A separate report on Friday showed business activity in the U.S. Midwest expanded in June at a slower pace. But the 60.2 reading on the National Association of Purchasing Management-Chicago business barometer still beat economists’ forecasts of 58.0. A reading above 50 indicates expansion. –Reuters
« Underground coal mining fails to shape up output | Mining magnate Talbot steps down »