US inflation up, consumer sentiment down

The economic data out of the US yesterday were not good. Bloomberg reports:

U.S. consumer prices rose more than forecast in May as record oil prices reduced American confidence to the lowest level since Jimmy Carter was in the White House.

The consumer price index increased 0.6 percent, the most since November, after a 0.2 percent gain the prior month, the Labor Department said today in Washington. The Reuters/University of Michigan preliminary index of consumer sentiment fell to 56.7 in June, a reading unseen since 1980, from 59.8 in May...

So-called core prices, which exclude food and energy, increased 0.2 percent in May from April, matching economists' forecasts...

The Reuters/University of Michigan report also showed the inflation rate that Americans expect over the coming five years remained at 3.4 percent, the highest since 1995.

However, US stocks rose anyway. From Bloomberg:

U.S. stocks rose, paring the week's losses, after oil retreated and some measures of inflation matched economists' forecasts, damping speculation the Federal Reserve will boost interest rates this year...

The Standard & Poor's 500 Index added 20.16, or 1.5 percent, to 1,360.03. The Dow Jones Industrial Average jumped 165.77, or 1.4 percent, to 12,307.35. The Nasdaq Composite Index advanced 50.15, or 2.1 percent, to 2,454.5. Five stocks gained for each that slipped.

Investors need to be careful about interpreting the data though. Research by Raphael Auer and Andreas Fischer shows that globalisation and cheap imports from low-wage economies had helped hold down inflation over the past decade -- primarily through productivity growth -- but may now keep core inflation elevated.

Indeed, inflation continues to show few signs of diminishing worldwide. India's inflation rate hit a 7-year high of 8.75 percent in the week ended 31 May while Germany's May inflation rate has been revised higher to 3.1 percent.