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U.S. inflation tame, supports Fed¡¯s low rate vow

The Labor Department said on Friday the Consumer Price Index rose 0.2 percent last month, lifted by a spike in energy costs, after increasing 0.2 percent in December. Analysts had expected a 0.3 percent gain.

Stripping out volatile energy and food prices, the closely watched core measure of inflation fell 0.1 percent, the first decline since December 1982. Financial markets had expected a 0.1 percent gain.

The costs of new vehicles, shelter and apparel fell, as did airline fares.

The tame inflation data helped calm fears that the Federal Reserve¡¯s decision to raise the discount rate it charges on emergency loans to banks, announced on Thursday, presaged a broader tightening of monetary policy.

¡°Today¡¯s CPI underscores the ample latitude that the Fed has to keep rates low for an extended period,¡± said Kathleen Stephansen, chief economist at Aladdin Capital Holdings in Stamford, Connecticut.

The U.S. central bank on Thursday raised the discount rate by a quarter-percentage point to 0.75 percent, citing improved financial market conditions. However, it maintained its pledge to keep overnight interbank lending rates at ultra low levels.

New York Fed President William Dudley, speaking on Friday, confirmed the Fed¡¯s vow on low benchmark rates ¡°is still very much in place.¡±

U.S. stock index futures pared losses on the inflation report but the market opened down. Treasury debt prices added to gains and the U.S. dollar, which had hit nine-month highs against the euro on the Fed¡¯s move, slipped.

Tamping down inflation fears

Fed officials see little near-term risk of inflation given that the unemployment rate stands at a lofty 9.7 percent and factories are running at only partial steam. Quarterly forecasts released by the Fed on Wednesday showed policymakers expect inflation to remain muted through 2012. ¨ûFED/FCASTS¨ü

A surprise surge in prices received by U.S. producers in January, reported on Thursday, had fanned fears that inflation pressures could soon weigh on the economy, which is recovering from the most brutal recession in 70 years.

The report on consumer prices helped ease those concerns.

¡°U.S. consumer prices came out tame during the month of January and that alleviates worries of higher inflation that we saw from yesterday¡¯s wholesale-level inflation report,¡± said Joe Manimbo, a currency trader at Travelex Global Business Payments in Washington.

He said the data ¡°reinforces the outlook for low U.S. interest rates for the foreseeable future.¡±

Consumer energy costs soared 2.8 percent last month after rising 0.8 percent in December, and food prices climbed 0.2 percent following a 0.1 percent gain in December.

Compared to January last year, overall consumer prices were up 2.6 percent, coming in below market expectations for a 2.8 percent increase and marking a slowdown from the 2.7 percent gain seen in the 12 months through December.

Core inflation was held back by a drop in the Labor Department¡¯s measure of shelter costs, which fell 0.5 percent, the biggest drop since December 1982.

The decline reflected a 0.1 percent dip in the department¡¯s measure of homeownership costs, which accounts for a quarter of the overall CPI, and a 2.1 percent decline in the price of lodging away from home.

Compared to a year ago, the core inflation rate rose 1.6 percent after increasing 1.8 percent in December.