November 10, 2015 / 2:02 PM / in 2 years

U.S. data show benign inflation, steady growth pace

WASHINGTON (Reuters) - U.S. import prices fell in October as the cost of petroleum and a range of goods declined, indicating that a strong dollar and soft global demand continued to exert downward pressure on imported inflation.

China Shipping containers lie on the dock after being imported to the U.S. in Los Angeles, California, October 7, 2010. REUTERS/Lucy Nicholson

Other data on Tuesday showed a surprise increase in wholesale inventories in September, suggesting that the slowdown in economic growth in the third quarter was not as abrupt as initially believed.

The Labor Department said import prices dropped 0.5 percent last month after declining 0.6 percent in September.

Import prices have now fallen in 14 of the last 16 months. Imported petroleum prices fell 2.1 percent after slipping 6.0 percent in September.

“We believe that weakness in emerging Asia, especially China, is likely to push down import prices over and above any effect from the appreciation of the dollar,” said Rob Martin, an economist at Barclays in New York.

In the 12 months through October, prices tumbled 10.5 percent. The robust dollar and a sharp decline in oil prices have weighed on inflation, which is persistently running below the Federal Reserve’s 2 percent target.

Weak inflation pressures, however, are unlikely to deter the U.S. central bank from raising interest rates next month after job growth surged in October and the unemployment rate fell to a 7-1/2-year low of 5.0 percent.

A tightening labor market could give Fed officials confidence that inflation will gradually move toward its target.

A Reuters survey of over 80 leading economists published on Tuesday showed a 70 percent median chance the Fed would raise its benchmark overnight interest rate at its Dec. 15-16 policy meeting.

“There is more pass-through to come and we may be looking at a longer lag between the peak in dollar appreciation and the trough in import price declines than has been typical,” said John Ryding, chief economist at RDQ Economics in New York.

The dollar has gained 16.6 percent against the currencies of the United States’ main trading partners since June 2014. Its impact on inflation was underscored by a 0.4 percent drop in import prices excluding petroleum last month, the largest decrease since January.

On Tuesday, the dollar rose to a fresh seven-month high against a basket of currencies as traders anticipated the first interest rate hike from the Fed in nearly a decade. Prices for U.S. Treasury debt were little changed and stocks were trading lower.

LESS INVENTORY DRAG

In a separate report, the Commerce Department said wholesale inventories increased 0.5 percent as rises in automobiles, furniture, farm products and apparel offset declines in machinery, petroleum and a range of other goods.

Wholesale stocks rose 0.3 percent in August.

Inventories are a key component of gross domestic product changes. The component of wholesale inventories that goes into the calculation of GDP - wholesale stocks excluding autos - increased 0.5 percent.

That is more than the government estimated in its advance GDP estimate, which showed inventories sliced off 1.44 percentage points from growth in the third quarter, leaving output expanding at a 1.5 percent annual rate.

As result, economists expect third-quarter GDP growth could be revised up to as high as a 1.9 percent rate later this month.

“The third-quarter inventory correction now looks less severe than we had previously believed,” said Daniel Silver, an economist at JPMorgan in New York.

Sales at wholesalers rose 0.5 percent in September after declining 0.9 percent in August. At September’s sales pace it would take 1.31 months to clear shelves, unchanged from August, a still-high level that suggests businesses have little incentive to aggressively restock warehouses.

“There is a risk that the inventory correction may be more prolonged than we had previously believed,” said Silver.

Reporting By Lucia Mutikani; Editing by Andrea Ricci

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