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US CPI Expected to Rise

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US CPI Expected to Rise

US producer prices rose sharply in April, further supporting the view consumer inflation is picking up after two years of very low levels.

The prices of consumer goods and services in the US probably increased 0.3 percent in April, according to a median estimate of economists in a Bloomberg poll. This translates into an annualized gain of 2 percent.

The so-called core measure, which excludes volatile products such as good and energy, edged up 0.1 percent, according to forecasts. Year-on-year, core CPI is believed to have expanded 1.7 percent.

On Wednesday the Labor Department said producer price inflation – the prices companies receive for their goods and services – rose at the fastest pace in seven months, reinforcing expectations for a strong CPI reading Thursday. Producer prices rose 0.6 percent in April, three times faster than forecast. Compared to April 2013, producer prices rose 2.1 percent. Economists forecast an annual gain of 1.7 percent.

Core prices excluding food and energy increased 0.5 percent month-on-month and 1.9 percent annually, official data showed. Both readings exceeded forecasts.

Higher inflation is a sign consumer demand is on the rise. The CPI measure is used to gauge the health of the recovery and future path of monetary policy. Persistently low inflation has enabled the Federal Reserve to maintain an extraordinary stimulus program designed to lower long-term interest rates and boost spending. Since November 2008 the Fed has eased around $4 trillion into the financial markets in an attempt to stimulate the economy.

Fed officials have tapered the pace of monthly bond buying by $40 billion since December 2013, citing broad improvements to the economy, led principally by the labour market recovery.

However, labour market recovery has been uneven in the US. Labour force participation is currently at 36-year lows, which partially explains the recent dip in the unemployment rate. Unemployment in April fell from 6.7 percent to 6.3 percent, a five-year low, while the participation rate declined 0.4 percentage point to 62.8 percent. Wage increases continue to be weak, as average hourly earnings remained flat in April.

Higher consumer prices may support the US dollar by raising expectations for a rate hike. The lack of clarity surrounding the future of monetary policy has weakened demand for the US dollar, which is still recovering from a five-month low against a basket of currencies.

The US dollar index bounced between 79.99 and 80.12, consolidating at 80.07. The greenback lost ground against the Canadian dollar and Japanese yen.

The US data wire will release a spate of economic indicators Thursday. In addition to CPI, the Labor Department will report on weekly jobless claims.

The Board of Governors of the Federal Reserve will report on industrial production/capacity utilization and Treasury International Capital Flows.

The National Association of Home Builders will provide a monthly snapshot of homebuilder confidence in April.

The Empire State manufacturing index will also be released, as will the Philadelphia Fed manufacturing survey.

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