Small CPI increase eases US inflation fears - Weekly mortgage applications fall

Small CPI increase eases US inflation fears - Weekly mortgage applications fall
By Sarah O’Connor in Washington
Copyright The Financial Times Limited 2009
Published: June 17 2009 15:39 | Last updated: June 17 2009 15:39
http://www.ft.com/cms/s/0/2d012f28-5b49-11de-be3f-00144feabdc0.html


Prices in the US crept up just 0.1 per cent in May in spite of the rising cost of fuel, easing fears that inflation could be looming as the economy starts to stabilise. Mortgage applications also fell to their lowest level since November, as the housing slump continued to deepen.

It was the first time in three months that the labour department’s consumer price index, a key measure of inflation, turned out to be lower than economists were expecting. They predicted a 0.3 per cent rise against the previous month.

Some have warned in recent weeks that inflation could kick in as the economy begins to recover. That could force the Federal Reserve to raise interest rates and reel in its efforts to increase the money supply; something the market believes is increasingly likely by the end of the year.

But Wednesday’s numbers supported the view that with so much “slack” in the eocnomy, inflation fears are unfounded. ”These numbers…clearly show that at least for now the immediate concerns over inflation are not justified,” said Marc Pado, market strategist at Cantor Fitzgerald.

Mark Vitner, senior economist at Wachovia, said inflation would “continue to give the Fed a free hand. They can maintain an accommodating monetary policy for a longer period of time now. And really, freedom of action is what the Fed needs.”

Oil prices surged to an 8-month high this month as expectations for demand picked up, which caused many to expect gasoline prices to rise in the US. But gasoline prices rose just 3.6 per cent in May. The cost of food fell 0.2 per cent.

“Core” prices, which strip out food and energy, rose 0.1 per cent. On the same period a year ago, they are up 1.8 per cent.

Meanwhile, mortgage applications in the US fell last week to the lowest level since November as a jump in borrowing costs discouraged refinancing and threatened to deepen the housing slump.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 16 per cent to 514.4 in the week ended June 12, from 611 the prior week. The group’s refinancing gauge declined 23 per cent, while the purchase index fell 3.5 per cent.

A separate report from the Commerce Department showed the US current account deficit shrank in the first quarter to $101.5bn, the lowest since the fourth quarter of 2001. While exports and imports shrank, imports fell more sharply – from $715.1bn in the previous three months to $581.5bn.