More signs of cooling in May

Inflation in the US appears to be cooling, but so does consumer demand.

The producer price index fell 0.6 percent in May on a seasonally-adjusted basis, according to the Labor Department yesterday. This followed a rise of 0.6 percent in April and 0.7-percent in March. The core index -- less food and energy -- was up 0.1 percent in May, compared with a 0.3-percent gain in April. Energy prices fell 3.5 percent in May.

At the same time, the Commerce Department reported that retail sales for May fell 0.5 percent from the previous month on a seasonally-adjusted basis. April sales, however, were revised to show an increase of 1.5 percent compared with the previously-reported 1.4 percent. Excluding autos, retail sales dropped 0.2 percent after a 1.4 percent jump in April.

Softness is also apparent in Europe.

While UK consumer price inflation, at an annual rate of 1.9 percent in May, remained at a seven-year high, elsewhere in Europe, France's annual inflation rate fell to 1.7 percent in May from 2 percent in April in European Union harmonized terms, Spain's dropped to 3 percent from 3.5 percent and Sweden's fell to all of 0.2 percent from 0.4 percent.

Little wonder that in Merrill Lynch's latest monthly survey of fund managers, inflation has stopped being a big worry. 48 per cent of fund managers expected global inflation to be higher a year from now, down from 70 per cent two months ago. At the same time, 33 per cent more managers expected the outlook for corporate profits to deteriorate over the next 12 months than expected it to improve.

In spite of these expectations, the survey found that 67 per cent of fund managers are underweight bonds and only 7 per cent overweight. In equities, 56 per cent are overweight, against 16 per cent underweight.