Economic data support Fed stance on interest rates

NEW YORK —  A closely watched gauge of U.S. consumer inflation fell in May to its slowest annual pace in three years, and Midwest business activity kept expanding in June at a healthy clip, reports showed Friday.

In a separate report, a Reuters/University of Michigan survey showed that consumer sentiment improved slightly in June from earlier in the month as gasoline prices ebbed. Even so, the final June reading was the lowest since August.

Taken together, the reports suggested that the Federal Reserve was succeeding in controlling price pressures while fostering moderate economic growth. They came a day after Fed policymakers said they would leave the benchmark interest rate at 5.25%, where it has stood for the last year.

The Commerce Department’s “core” personal consumption expenditures price index, which removes food and energy costs, rose 1.9% in May from a year earlier, its smallest annual rise since March 2004.

On a month-to-month basis, overall prices rose a stiff 0.5% in May, but core prices edged up just 0.1%.

The core inflation reading is “a dip into their comfort zone, and if it’s sustainable going forward, I think it suggests the Fed is not in a position to raise rates any time this year,” said John Silva, chief economist at Wachovia Securities in Charlotte, N.C.

After this week’s policy meeting, Fed officials acknowledged that inflation had eased but stressed that higher prices were still a top concern.

A separate report showed that a rush of new orders kept factory activity growing rapidly in June, suggesting the U.S. economy remained robust.

The National Assn. of Purchasing Management-Chicago business barometer came in at 60.2 in June, down from 61.7 in May but above economists’ forecasts of 58. A reading above 50 indicates expansion.

The report was “consistent with solid manufacturing expansion,” said David Sloan, analyst at 4Cast Ltd. in New York.

The Commerce Department report also showed that consumers boosted spending in May by 0.5%. That was less than Wall Street had expected and hinted that more sedate spending might keep a lid on prices. Incomes rose by 0.4%, also less than expected.

The Reuters/University of Michigan consumer sentiment survey showed a final June reading of 85.3, below the 88.3 in May and the lowest reading since August.

“The basic picture is that consumers are being weighed down by high gasoline prices and more recently by weaker equity and home prices,” said Bruce Kasman, chief economist at J.P. Morgan in New York.