WRAPUP 5-US consumer prices dip, support Fed’s low rate vow

* Consumer prices fall for the first time in a year

* Year-on-year core CPI rate lowest since 1966

* Report supports Fed’s low interest rates pledge

* Home purchase loan demands falls in latest week
(Updates with closing market prices)

By Lucia Mutikani

WASHINGTON, May 19 (BestGrowthStock) – U.S. consumer prices fell
for the first time in a year last month and the closely watched
core inflation rate posted its smallest annual gain since 1966,
pointing to a lack of price pressure as the economic recovery
gathers steam.

The Consumer Price Index unexpectedly slipped 0.1 percent
in April, the Labor Department said on Wednesday, which
analysts said should allow the U.S. Federal Reserve to focus on
supporting growth, especially as Europe’s debt crisis looks set
to slow economies in that region.

An industry report released separately showed demand for
loans to buy homes sank 27.1 percent to a 13-year low last week
after the expiry of a home buyers tax credit, suggesting a
recovery in housing will be painfully slow. [ID:nN19225369]

“The inflation picture is very well controlled and that’s
going to give the Fed an opportunity to stay accommodative for
a longer period of time. It’s a good environment to help keep
the economy here growing,” said Michael Strauss, chief
economist at Commonfund in Wilton, Connecticut.

The April CPI was pulled down by declining energy costs.
Consumer prices rose 0.1 percent in March and analysts had
expected a similar gain in April.

The core inflation rate, which excludes volatile food and
energy costs, was flat last month. Over the past 12 months,
core inflation has risen just 0.9 percent, the smallest gain in
more than 44 years.

The Fed cut benchmark overnight lending rates to near zero
in December 2008 and has vowed to keep them extraordinarily low
for an “extended period” to nurse the economy back from its
worst downturn since the 1930s.

Minutes of the Fed’s April policy meeting, released on
Wednesday, indicated the U.S. central bank does not see
inflation as a near-term risk. [ID:nWEQ003931]

While the economy has grown for three straight quarters and
employers have added jobs for four months in a row, the
unemployment rate stands at 9.9 percent.

STUBBORNLY HIGH UNEMPLOYMENT

Analysts said with unemployment still stubbornly high,
inflation was likely to remain muted for a while, and some even
saw the risk of deflation — an economically disabling,
broad-based decline in consumer prices.

“Elevated unemployment and stagnant wages have caused
retail chains to slash prices and firms have chosen to absorb
increasing costs at earlier stages of production rather than
pass them along downstream,” said Joseph Brusuelas, chief
economist at Brusuelas Analytics in Stamford, Connecticut.

U.S. financial markets shrugged off the data, remaining
preoccupied with Europe’s debt troubles. The broad U.S.
Standard & Poor’s index (.SPX: ) briefly pierced 1,102.12, its
200-day moving average, seen as a support level. It pulled back
to end down 0.51 percent at 1,115.05.

Speculation European monetary authorities might act to
support the euro saw the U.S. climb down from a four-year high
against the single euro zone currency. Prices for U.S.
government bonds fell modestly.

While analysts generally believe the fiscal problems in
Europe will have a minimal impact on the U.S. economy, Paul
Volcker, the former Fed Chairman who is a White House economics
adviser, said the European crisis showed the risks for the
nation if it did not get its budget deficit under control.
[ID:nN18160537]

The U.S. government’s record economic stimulus package
helped push the budget deficit last year to $1.4 trillion,
roughly 10 percent of gross domestic product. There have been
fears the budget deficit and the vast amounts of money pumped
into the economy by the Fed could stoke inflation.

For now, those concerns have faded as substantial slack in
the economy is keeping price pressures subdued.

Contributing to the consumer price weakness in April,
energy and gasoline costs saw their largest declines in over a
year. Food prices rose moderately for a second straight month.

Core consumer prices were held back by new vehicle and
shelter costs, which were unchanged. Clothing prices fell,
while medical care costs rose marginally.

A glut of homes on the market is keeping rental costs in
check, a trend likely to continue amid expectations the housing
market will struggle to recover without government incentives.

Home buyers looking to cash in on federal tax credits had
to have signed contracts by April 30 and must close on their
loans by June 30.

The week ended May 14 was the second straight week that
demand for loans to buy homes fell, after three straight weeks
of sharp gains before the April 30 deadline, data from the
Mortgage Bankers Association showed.

“It’s disturbing,” said John Canally, economist at LPL
Financial in Boston. “It seems that every other data point for
housing is pretty good, so I’m leaning toward the hangover from
the tax credit.”

Demand to refinance mortgages, however, jumped 14.5 percent
last week to a nine-week high. But in another sign of problems
plaguing the housing recovery, the industry group also said one
in every seven households with a mortgage ended the first
quarter behind on payments or in foreclosure. [ID:nN19233372]
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U.S. inflation graphic: http://link.reuters.com/keh25k
U.S. mortgages graphic: http://link.reuters.com/naf25k
For more on economy see Reuters Breakingview:
U.S. deflation threat not yet fully neutralized
[ID:nN19226578]
New optimism of the rich may be leading indicator
[ID:nN18145438]
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(Additional reporting by Lynn Adler; Editing by Diane Craft)

WRAPUP 5-US consumer prices dip, support Fed’s low rate vow