US rate rise moves closer as inflation pressures grow

Speculation that the US Federal Reserve will order its first interest-rate rise for four years next month moved up a gear yesterday after official figures showed rising inflationary pressures.

Speculation that the US Federal Reserve will order its first interest-rate rise for four years next month moved up a gear yesterday after official figures showed rising inflationary pressures.

The core measure of inflation that the Fed targets climbed more sharply than expected, the government said, ticking up by 0.3 per cent on the month.

A big jump in consumer prices in March had spooked financial markets and helped convince investors that the Fed would raise overnight borrowing costs from a 1958-low of 1 per cent as soon as its next meeting at the end of June.

The latest rise in core inflation bolstered those expectations in the Treasury bond market, sending prices down and market interest rates up.

On Wall Street, the Dow plunged briefly back below the key 10,000 level as traders bet on a rate rise when the Fed meets next month. "We expect the Fed to tighten in June and August," said John Shepperd, chief economist at Dresdner Kleinwort Wasserstein in London. In the first four months of this year, consumer prices rose at an annual rate of 4.4 per cent, compared with a 1.9 per cent increase for all of last year. Core prices also picked up steam. So far this year, they went up at a rate of 3 per cent, outpacing the 1.1 per cent rise for 2003.

However, the headline inflation figures rose less than expected, as energy prices stayed virtually unchanged after three months of sky-rocketing prices.

This may prove short-lived as crude oil prices vaulted to record highs yesterday on fears over the potential for supply disruptions in the Middle East and the strong demand of a recovering global economy.

Factory output rose sharply last month, a Fed report showed. Industrial production gained a larger-than-expected 0.8 per cent while production capacity in use rose to 76.9 per cent, its highest level since July 2001.

Meanwhile, Americans were as upbeat in early May as they were in April, though their view of the future was the gloomiest this year as concern over high petrol prices and Iraq began to weigh, a separate survey showed.