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Published: Tue, May 02, 2017
Economy | By Melissa Porter

Key US inflation measure sees first drop in 16 years

Key US inflation measure sees first drop in 16 years

USA stocks were little changed as gains in technology stocks, led by Apple AAPL.O , countered the weak reports.

O'Sullivan noted "the weakness in spending in Q1 contrasts with the much stronger signal from the confidence data". A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the USA economy. The ISM index had risen since last November, scaling a 2-1/2-year high in February, amid optimism over President Donald Trump's pro-business policy proposals.

"Consumers still have a lot going for them: a tightening labor market with rising income growth, solid consumer confidence readings, a strong assist from rising stock and home prices, and mortgage rates that have fallen back since the March highs", Scott Anderson, chief economist at Bank of the West in San Francisco, said in a research note before the report. The Trump administration last week proposed a tax plan that includes cutting the corporate income tax rate to 15 percent from 35 percent, but offered no details.

The figures were foreshadowed in Friday's report on gross domestic product that showed the slowest first quarter for household spending since 2009. Prices for USA government bonds were trading lower, while the dollar was marginally lower.

Economists polled by Reuters had forecast consumer spending, rising 0.2 percent.

Consumer spending accounts for more than two-thirds of USA economic activity. The PCE deflator was down 0.2 percent during the last month of the first quarter, while the core PCE was down 0.1 percent.

The US Personal Consumption Expenditure (PCE) price index declined 0.2% for March following a 0.1% gain the previous month. Sterling dipped against the dollar on Monday as sterling retreated against dollar after investors shrugged off weak USA factory activity and inflation data on the view that it was unlikely to impede a June interest rate increase from the Federal Reserve.

The Fed would likely label Monday's weak US economic data as "transitory" in the central bank's Wednesday policy statement, said Richard Franulovich, senior currency strategist at Westpac Banking Corp in NY. The core PCE is the Fed's preferred inflation measure and is below the central bank's 2 percent target.

Overall prices rose 1.8% from a year earlier, while core prices climbed 1.6%. That was the first decline since February 2016 and the biggest drop since January 2015.

Personal income rose less than expected in March while spending was flat, according to the Bureau of Economic Analysis.

Consumption will likely be supported by rising wages. A report on Friday showed private wages recorded their biggest increase in 10 years in the first quarter. The Australian dollar recovered some ground against the dollar on Monday after data showed US manufacturing slowed while consumer spending was flat. A cold snap boosted demand for heating, lifting spending on services by 0.4 percent. The combination of weak spending growth and stronger income growth pushed the saving rate to 5.9 percent of after-tax income in March, up from 5.7 percent in February.

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