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Published: Friday, 6/18/2010

Report: Inflation is unlikely with interest rates, job growth predicted to stay low

BLOOMBERG NEWS

The world's largest economy will keep expanding in the second half of the year without stoking inflation or generating many jobs, reinforcing the Federal Reserve's low-rate policy, reports Thursday showed.

The index of leading indicators, a gauge of the outlook for growth over the next three to six months, climbed 0.4 percent in May, according to data from the privately owned Conference Board.

Other figures released Thursday showed the cost of living dropped, claims for jobless benefits unexpectedly increased to the highest level in a month, and manufacturing in the Philadelphia Fed region cooled.

"The recovery is intact," said Ellen Zentner, a senior U.S. macroeconomist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

"With price data like we saw today, the Fed is absolutely able to stand pat through this year without any qualms about inflation. The labor market is still in a precarious position."

Stocks dropped, halting a global rally, as the reports raised concern the European debt crisis may prompt American companies to rein in hiring. The drop in commodity prices brought on by the turmoil and price cuts by retailers highlight the Fed's forecast for "subdued" inflation.

The Labor Department said consumer prices dropped 0.2 percent in May, a second consecutive decrease and the biggest since December, 2008. Excluding food and fuel, the so-called core rate increased 0.1 percent. The figures matched the median forecasts of economists surveyed.

Last month's fall was led by a decrease in energy costs. In the 12 months ended in May, consumer prices rose 2 percent following a 2.2 percent year-over-year gain the prior month. The core rate rose 0.9 percent from May, 2009, matching the smallest year-over-year gain since 1966.

The deceleration in inflation led economists at

JPMorgan Chase & Co. Thursday to push their forecast for a rate increase by the central bank to the fourth quarter of 2011 from the second quarter of next year.

"The disinflation we have witnessed could be with us for some time," Michael Feroli, JPMorgan's chief U.S. economist, said in a note.

A separate Labor Department report on initial jobless claims show they increased by 12,000 to 472,000 last week. Economists surveyed by Bloomberg News projected the number of applications would drop to 450,000, according to the median forecast.

The figures indicated firings are staying elevated even as the economy grows. Some companies are trimming payrolls to boost or maintain profits at the same time overall employment has grown each month this year.

"The labor market is not improving," said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. "If you really are going to have a sustainable recovery, you need the labor market to improve."

Manufacturing in the region covered by the Philadelphia Fed expanded in June at the slowest pace since August as a measure of factory employment contracted for the first time in seven months, the regional Fed said.

Other data from the Labor Department showed consumer prices dropped 0.2 percent in May, a second consecutive decrease and the biggest since December 2008.



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