Weak US inflation complicates Fed rate decision

US consumer prices unexpectedly fell in August as petrol prices resumed their decline and a strong dollar curbed the cost of other goods, pointing to tame inflation that complicates the Federal Reserve’s decision whether to hike interest rates.

The department of labor said on Wednesday its consumer price index slipped 0.1 per cent, the first drop since January, after edging up 0.1 per cent in July. In the 12 months through August, the CPI rose 0.2 per cent after a similar gain in July.

Signs of a disinflationary trend reasserting itself are in stark contrast with a fairly healthy economy and a rapidly tightening labour market, and highlight the dilemma Fed officials face as they contemplate raising interest rates for the first time in nearly a decade.

The US central bank’s policy-setting committee was due to start a two-day meeting later on Wednesday.

While solid data on consumer spending, housing and employment have been supportive of a rate hike, the case for higher borrowing costs has been undermined by recent global financial markets turmoil.

"You can make a strong case either way for the Fed to begin raising interest rates or waiting," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

“The prudent risk management approach would argue for them to hold off, but if the Fed was really data dependent there is a very a strong case to raise rates on Thursday.”

US financial markets were pricing a 29 per cent probability of a lift-off in the Fed’s benchmark overnight interest rate on Thursday, little changed from before the data’s release.

A Reuters survey of 80 economists showed 45 expected the US central bank to keep its short-term interest rate near zero.

Stocks on Wall Street were trading higher in the wake of the soft CPI data. Prices for US Treasuries rose marginally, while the dollar fell against a basket of currencies.

Tightening labour market conditions, marked by record high job openings and a 5.1 per cent unemployment rate, have so far not spurred faster wage growth.

Sluggish wage gains and a strong dollar have contributed to keeping inflation below the Fed’s 2 percent target. Economists had forecast the CPI unchanged in August and rising 0.2 per cent from a year ago.

- Reuters