Consumer prices rose in June for the fifth month in a row driven by a surge in rental expenses that countered declines in import prices due to a stronger dollar and weak global demand.
The consumer price index climbed 0.3 percent following May's 0.4 percent gain, according to Labor Departement statistics released today. Annual price gains in June were 0.1 percent. That is the first positive reading this year as the collapse in energy costs brought inflation down from last June's high of 2.1 percent. Both June results matched the median forecasts in the Bloomberg survey of economists.
The core inflation rate, excluding food and energy items, increased 0.2 percent in June as expected, after gaining 0.1 percent in May. On the year it was up 1.8 percent, 0.1 percent more than May.
This core measure, though an older gauge and not the Fed's preferred personal consumption expenditure price index (PCE), nevertheless is watched by analysts along with wholesale price indexes as a general indicator for inflation trends in the economy.
The index was last at the Fedral Reserve's 2 percent target in May of last year and before that in February 2013. In the year through June core CPI averaged 1.74 percent.
Fed Chair Janet Yellen and other bank officials have repeatedly said that they want to be certain that inflation is headed back to 2 percent in the medium term before they raise the Fed Funds rate from its current 0.25 percent. It would be the first Fed Funds increase in almost nine years.
In Congressional testimony yesterday Ms Yellen repeated what she has said many times in the past few months, that if the economy continues to improve as the bank expects the initial hike will come later this year. Several regional Fed Presidents have noted that a core PCE rate below the 2 percent target would not prevent the central bank from raising rates.
Expenses associated with rental housing climbed the most in two years and accounted for almost two-thirds of the rise in the core inflation rate. Rents for primary residences jumped 0.4 percent on the month the most since August 2013.
More and more Amercians are living in apartments or renting their homes rather than owning despite low mortgage rates and a relatively strong job market. Household formation has also fallen since the recession.
It is possible that prospective home buyers are being disuaded from purchase by the rapid home prices increases in the last few years and effectively stagnant wages. Many of the jobs created since the recession have been temporary or in low paying service industries.
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Chart: FX Street