US clothing costs drive up inflation

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US inflation accelerated in March, injecting fresh uncertainty into expectations for future interest rate moves by the Federal Reserve.

The consumer price index rose by 0.4 per cent last month while the core index climbed by 0.3 per cent. The core measure, which is more closely tracked than the main reading, excludes volatile energy and food prices. Analysts had been expecting a rise of just 0.2 per cent.

Annually, the core held steady at 2.1 per cent, although this could rise in the coming months as a result of tame increases last summer which could make further rises look particularly sharp on a year-on-year basis. Between April and September 2005, core prices rose at a rate of 1.5 per cent. To date this year, the average has been 2.3 per cent.

The data were something of an antidote to Tuesday, when stocks jumped after the newly-released minutes of the Fed’s last meeting were interpreted as signalling an imminent end to the central bank’s steady series of quarter-point rate rises.

A quarter-point rise to 5 per cent at the Fed’s next meeting in May is currently expected.

“We still think that the Fed will be comfortable with a pause at 5 per cent, but core inflation increases over the coming months will suggest that at least some of the big run-up in energy and other commodity prices is working its way through,” said Rick MacDonald, director of investment research at Action Economics.

The main culprits behind the rise in CPI were a 1 per cent jump in apparel costs, exactly reversing their drop in February and a 0.4 per cent rise in ‘owners’ equivalent rent’ - the single biggest component in the index. With that strong rise, OER actually rose by an annualised 3.3 per cent in the first quarter of this year - its strongest rate since 2002.

“With interest rates rising and demand for new home ownership slowing, it is likely that stronger demand for rental properties will push rental rates up at a higher pace,” said Peter Kretzmer, senior economist at Bank of America.

Ian Shepherdson, chief US economist at High Frequency Economics, added: “If this continues it can do real damage to core inflation, making it all the more important that the Fed succeeds in slowing the economy to ease inflation pressure from wages and profit margins.”

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