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US Inflation Falls Sharply

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The US has just published two important economic data releases relating to inflation and housing statistics for February.

The Consumer Price Index information for the month consists of a multitude of components. The headline information however points to a stark reduction in US prices. February’s year on year reading is 1.1%, down on last months 1.6% and also missing the consensus estimate of 1.2%. The more stable Ex Food & Energy version of this figure however held up unchanged against last months 1.6%.

On the housing front the issuing of new Building Permits is continuing to rise, last month saw 1.018M new permissions given against January’s figure of 0.937M. Backing up this data is a relatively flat print in the new Housing Starts, 0.907M units began construction in February compared to an upwardly revised 0.909M in January.

The Federal Open Markets Committee (FOMC) will be concerned by the inflation figure when it begins its two day long monetary policy deliberations later this afternoon. US inflation is currently in the ‘sweet spot’ for this stage of an economic recovery, the Fed will be determined to keep between the 1-2% level although preferably at the higher end of this range while economic activity continues to grow.

That being said there are currently not a huge amount of options open to the FOMC to encourage US growth. At one quarter of one percent interest rates are as close to zero as they are going to get. The Fed does however have the possibility to reduce the rate at which it is winding down it’s bond repurchase program. Currently this initiative is set to last until the end of the year with the Fed purchasing $10bn fewer bonds in the open market each month. Reducing this to $5bn is not likely to have a dramatic monetary effect on an economy the size of the US, it is however likely to send a meaningful signal with the potential to reaffirm confidence in the recovery.

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