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Friday, August 31, 2007

US inflation slows in July

US inflation slows in July
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: August 31 2007 15:30 | Last updated: August 31 2007 15:30


US inflation cooled last month, giving the Federal Reserve more scope to cut interest rates in response to the crisis in credit markets.

Fed Chairman Ben Bernanke made clear in a speech on Friday that the central bank is alarmed by threat to the US economy from extreme market turbulence and tightening lending conditions.

Investors are betting on a rate cut when the Fed meets next month, but the 53-year-old chairman is keen to be seen to be responding to economic conditions and not be bailing out Wall Street.

The slowdown in underlying inflation will make it easier for him to justify cutting rates, which can stimulate price rises and encourage investors to take risks in the hope the Fed will step in if things turn sour.

Peter Kretzmer, an economist at the Bank of America, said: ”With the federal open market committee recently acknowledging increased downside risks to the economy, the positive news on the core inflation front will be welcome at the Fed.”

The fresh government figures showed that core inflation - excluding food and energy costs rose 0.1 per cent in July, less than the 0.2 percent gain projected by economists and recorded the previous month.

This put the annual rate of core inflation at 1.9 per cent, according to the Fed’s favoured measure.

There were also positive signs for the economy as consumer spending rose more than forecast in July, a sign that households were adding to economic growth at the start of the third quarter, before the credit crunch.

Personal spending rose 0.4 per cent following a 0.2 per cent gain in June that was bigger than initially estimated, the Commerce Department said.

Mr Kretzmer said: ”These data suggest a relatively favorable economic backdrop for consumers in July, prior to the most recent bout of financial market turmoil.”

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