Monday June 14, 2:57 pm Eastern Time
Moderate US CPI rise unlikely to prevent rate hike
By Richard Leong
NEW YORK, June 14 (Reuters) - U.S. inflation at the consumer level likely cooled in May after a market-jarring spike in April, but the mild uptick probably would not deter the Federal Reserve from hiking interest rates later this month.
The Fed likely will raise rates regardless of the Consumer Price Index (CPI) because it wants take a ''preemptive'' strike against inflation, said Marilyn Shaja, Donaldson Lufkin and Jenrette's money economist.
The May CPI numbers will be ''muted'' from April, she added.
U.S. economists polled by Reuters called for May CPI to rise by 0.2 percent after April's 0.7 percent jump, which was driven by surges in gasoline, tobacco and clothes prices.
The core CPI, which strips out volatile food and energy costs, would probably simmer down to a 0.2 percent rise in May after April's 0.4 percent increase, the economists predicted.
The U.S. Labor Department is slated to release the May consumer price report on Wednesday at 0830 EDT/1230 GMT.
While the CPI garners fanfare in the general media since it is the main barometer of inflation, economists said that the Fed has been tracking other economic factors, mainly consumer spending, to determine whether a rate increase is necessary to stamp out inflationary pressure.
''The Fed will not raise rates in response to rising prices, but to slow demand growth,'' Ram Bhagavatula, chief economist at NatWest Global Financial Markets, said.
''The Fed's interest is in the future inflation prospect, not last month's prices or this month's prices,'' said Richard Rippe, chief economist at Prudential Securities Inc.
Still, the May CPI will be keenly watched after the April data injected the financial markets with rate jitters.
''The outsized April CPI is the watershed event that led everyone to believe in a rate hike,'' Douglas Porter, senior economist at Nesbitt Burns Securities Inc., said.
It would take a spectacular May CPI, either a flat core rate or a negative overall reading, to change Wall Street's sentiment of an imminent rate hike. ''And that's not likely,'' Porter said.
Wall Street, along with other global financial centers, widely expects the Fed to raise the federal funds rate by 25 basis points when its policy-setting arm -- the Federal Open Market Committee (FOMC) -- meets June 29-30.
The Fed has held the key fed funds rate for overnight interbank lending at 4.75 percent since November after three 25 basis-point cuts to allay the global credit crisis last autumn.
At its previous meeting on May 18, the FOMC adopted a tightening bias on interest rates, which meant it was leaning toward raising rates in the future.
Inflation has stayed low over the past couple of years, surprising the Fed and economists, despite robust growth and a tight labor market. But signs that both domestic manufacturersand overseas economies are recovering from their slump threaten to overheat the economy and disrupt the near picture-perfect inflation climate.
''There has been every sign that the economy is thundering along,'' Porter said. ''If the Fed doesn't act now, various economic factors will act in symphony in building inflationary pressure the rest of the year.''
At least in May, most consumer prices are expected to moderate from the unexpected jump in April.
''Many of the items in April should slow down in May. The April report was unfortunate because it coincided with one-time price hikes'' in gasoline, apparels and tobacco, said Carol Stone, deputy chief economist at Nomura Securities International Inc.
The May CPI core rate is also expected to return to its 0.2 percent trend after doubling that average in April, according to economists.
''The April core rise was playing catch-up with the previous three months, which were unusually low. It will go back to its trend in May,'' Prudential's Rippe said.
Moreover, economists expect gasoline prices to edge up moderately in May after jumping 15 percent in April.
Meanwhile, in addition to the May CPI report, market participants will gauge the Fed's sentiments on inflation and monetary policy from testimony by Fed Chairman Alan Greenspan on Thursday before the Joint Economic Committee of Congress.
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