Friday 29 March 2019 1:59 pm

Growth in key US inflation rate slows in sign of cooling economy

A key measure of US inflation rose 1.8 per cent in January compared to a year earlier, its slowest rate of growth since February 2018, figures released today showed.

Read more: US economic growth unexpectedly slows in final quarter

Consumer spending increased by 0.1 per cent in January compared to December, recovering from a 0.6 per cent fall in the final month of 2018, figures released by the US Department for Commerce showed. This figure was below the monthly average growth rate for 2018.

Personal income in the US grew by 0.2 per cent in February after shrinking 0.1 per cent in January. The figure was well below the long term monthly growth rate of 0.35 per cent.

The dollar and US stock markets both rose as they took on board both the mixed economic data and news that negotiations over the US-China trade wars resumed in Beijing today. The S&P 500 opened up 13 points, and rose 0.25 per cent after trading began at 2.30pm UK time.  

The slower growth in the core personal consumption expenditures (PCE) index, the key measure of US inflation that rose 1.8 per cent year on year in January, could be seen as justification of the US Federal Reserve’s reluctance to raise interest rates.

Last week the Fed said it would keep rates on hold longer than expected, citing the cooling US and global economies. It uses the core PCE index as its main inflation rate, and aims for it to be at two per cent.

Andrew Hunter, senior US economist at Capital Economics, pointed to long term factors “like globalisation, technological progress, reduced unionisation of workers” as a reason why US inflation has stayed low in recent years.

“Those factors aren’t going to go away any time soon”, he said. “There really doesn’t appear to be any danger of inflation rising above target so [the Fed] can essentially just focus on what’s happening in the real economy.”

Read more: Fed slows balance sheet reduction and holds line on rates

He added: “Consumer spending growth is on course to slow quite sharply in the first quarter, overall GDP growth also seems to be slowing so in that environment, with inflation low and stable, it’s pretty clear [the Fed] won’t be raising rates any time soon.”