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REPEAT:ANALYSIS:Labor Cost, PCE Infl Still a Challenge for Fed

Repeats Story Initially Transmitted at 15:08 GMT Jul 28/11:08 EST Jul 28
--Mixed Bag of Data Shows Little Sign Inflation Breaking Out
By Jean Yung
     WASHINGTON (MNI) - Federal Reserve officials looking for fresh signs that
labor costs or consumer inflation are breaking out of a pattern of sluggish
growth are likely to be frustrated by Friday's data. 
     Policymakers have said they expect a tighter labor market to eventually put
upward pressure on wages, but compensation has not picked up meaningfully even
as the unemployment rate hit new lows, the latest Labor Department report
showed. 
     It also came as no surprise that price levels in the second quarter rose at
a disappointing 0.9% rate, the smallest quarterly increase since 0.9% in the
first quarter of 2015, even as the latest data showed inflation last year was
slightly higher than previously thought. 
     Despite a tightening labor market, the employment cost index, a broad gauge
of employers' wage and benefit expenditures, rose at a seasonally adjusted 0.5%
rate in the second quarter, a bit less than analysts expected and failing to
carry forward a pick-up in momentum from the first quarter. 
     Over the past 12 months, the index held steady at 2.4% growth, the Labor
Department said, still at the high end of the post-recession range. Benefits
were up 2.5% on the year, rising faster than the 2.2% rate in first quarter and
continuing the gradual upward trend.
     "We expect upward pressure to build as the unemployment rate keeps falling,
but, for now, these data will be viewed as fairly benign by Fed officials," Jim
O'Sullivan of High Frequency Economics said in a note to clients Friday. 
     Friday's GDP report, which included annual revisions to data over the past
three years, offered a couple bright spots for officials. The economy revved up
in the second quarter as consumption picked up and business investment added
another 5.2% on top of the 7.1% gain in the first quarter. 
     The Fed's preferred measure of inflation, the core personal consumption
expenditures price index, was also revised a tenth higher last year to a 1.8%
annual rate. 
     Quarter-over-quarter, inflation was at or above the Fed's 2% target through
the first three quarters of 2016 before slowing to 1.3% in the final three
months of the year -- welcome news for policymakers. 
     But it is overshadowed by the softness in inflation in more recent months,
which the data again confirmed Friday. 
     Second quarter core PCE prices were up 1.5% from a year earlier, after a
1.8% rise in the first quarter and 1.9% gain in the fourth quarter. That is the
smallest gain since the fourth quarter of 2015, when core PCE prices rose just
1.3%.
     The Federal Open Market Committee this week stuck to its outlook for
inflation to return to target over the medium term even as it acknowledged
inflation had declined in recent months. 
     But if that weakness persists, the Fed may find itself pushing the next
rate hike until 2018. 
     As Chair Janet Yellen told Congress this month: "We're watching this very
closely and stand ready to adjust our policy if it appears that the inflation
undershoot will be persistent."
     The Labor Department will release the PCE report for June on Tuesday. 
     Vs Prev Qtr        Vs Year Ago
            1Q17  2Q17         1Q17  2Q17
-----------------------------------------
ECI          0.8   0.5          2.4   2.4
                        Vs Prev Qtr
                               2Q16  3Q16  4Q16  1Q17  2Q17
-----------------------------------------------------------
Headline PCE Inflation          2.1   1.7   2.0   2.2   0.3
Core PCE Inflation              2.0   2.0   1.3   1.8   0.9
                        Full Year              4Q/4Q
                             2014  2015  2016   2014  2015  2016
----------------------------------------------------------------
Headline PCE Inflation        1.5   0.3   1.2    1.2   0.4   1.6
Core PCE Inflation            1.6   1.3   1.8    1.5   1.3   1.9
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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