Expectations of a rise in US interest rates this summer grew yesterday after stronger inflation figures helped lay to rest any lingering fears of deflation.
Consumer prices rose by 0.5 per cent in March, higher than the 0.3 per cent forecast by the market. Excluding volatile food and energy prices, inflation rose by 0.4 per cent on the month and 1.6 per cent compared with March last year - a significant increase on the 1.2 per cent reported last month.
Coming on the heels of robust retail sales and employment figures, yesterday's data reinforced confidence that the Federal Reserve will soon start to edge interest rates higher. "We now have pretty conclusive evidence inflation has bottomed and this removes one of the remaining impediments to action by the Fed," said Mr Alan Ruskin, director of research at 4Cast, the economic consultancy.
The yield on the 10-year Treasury bond climbed a further six basis points yesterday to 4.41 per cent. Its yield has now risen 52 basis points since the release two weeks ago of the first compelling evidence that companies are finally starting to hire in response to rising demand.
Federal Reserve officials are increasingly confident that inflation has stabilised, after a long period during which the rate of inflation declined, and are no longer seriously concerned about the risk of further substantial disinflation.
The minutes of January's meeting of the Federal Open Markets Committee (FOMC) show that there were disagreements among policymakers on the likely path of inflation this year. But strong job growth in March, and revisions to prior months, indicates monthly average gains of 171,000 in payroll employment in the first quarter, a marked improvement on last year.
Economists say concerns over the weak labour market prevented the FOMC from shifting its assessment of the balance of risks on inflation to "equal" from "almost equal" when the committee met in March. Economists said it looked likely that economic growth in the first quarter would reach 5 per cent, rather than the 4.5 per cent previously expected. - (Financial Times Service)
