U.S. labor market tightening; inflation still muted

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits fell last week to near a 15-year low, indicating the jobs market was on solid footing even as the economy struggles to regain momentum after abruptly slowing in the first quarter.

Despite the tightening labor market, a strong dollar and lower oil prices are keeping inflation under wraps. That trend along with signs of modest economic growth early in the second quarter would suggest the Federal Reserve will probably not raise interest rates until later in the year.

“The labor market is doing well … inflation is not going anywhere fast. There is no urgency for the Fed to start normalizing monetary policy, they will likely wait until September,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester Pennsylvania.

Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 264,000 for the week ended May 9, the Labor Department said on Thursday, within a whisker of a 15-year low reached two weeks ago.

Claims have been below 300,000, a threshold associated with a strengthening labor market, for 10 straight weeks. Economists had forecast claims rising to 275,000.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell to the lowest level since April 2000.

U.S. stocks were trading higher on the data. Prices for U.S. government debt also rose, while the dollar slipped against a basket of currencies.

The economy barely grew in the first quarter, held back by a range of factors, including the dollar, bad weather and port disruptions. Retail sales and manufacturing data suggest that the pace of activity, while picking up, remains modest.

POLICY DILEMMA

The dollar has gained about 11 percent against the currencies of the main U.S. trading partners since June. The claims data, which economists said was consistent with monthly job gains in excess of 200,000, underscored the Fed’s dilemma.

Policymakers believe the economy is poised to strengthen and the labor market appears to be tightening, but surprisingly soft growth and subdued inflation pressures are complicating their plans to lift rates.

The U.S. central bank, which has a 2 percent inflation target, has kept its key short-term interest rate near zero since December 2008.

In a separate report, the Labor Department said its producer price index for final demand fell 0.4 percent last month as the cost of energy products and food declined.

It was the third time this year that the PPI dropped and followed a 0.2 percent increase in March.

Producer prices also were weighed down by declining profit margins at retailers and wholesalers. In the 12 months through April, producer prices fell 1.3 percent, the biggest year-on-year decline since 2010, after declining 0.8 percent in March.

“Despite an even tightening labor market, inflation is totally under control, complicating the Fed’s decision-making,” said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania. “The Fed must keep its finger on the trigger, even if it doesn’t have to pull it just yet.”  

Economists had forecast the PPI rising 0.2 percent last month and falling 0.8 percent from a year ago.

A drop of 0.7 percent in the index for final demand goods accounted for more than 70 percent of the decline in the PPI last month. Energy prices fell 2.9 percent after rising 1.5 percent in March. Food prices fell for a fifth straight month.

Last month, the volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, fell 0.8 percent after slipping 0.2 percent in the prior month.

A key measure of underlying producer price pressures that excludes food, energy and trade services ticked up 0.1 percent after rising 0.2 percent in March.

While the weakness in the PPI is unlikely to be fully reflected in next week’s consumer inflation data, as the relationship between the two has weakened, economists said the very benign inflation environment would persist for a while.

“The continued weakness in both import and producer prices suggest that pipeline inflationary pressures remain quite weak,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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