Fears that resurgent US inflation would prompt an increase in interest rates subsided yesterday after a government report showed no inflation last month.
Consumer prices were unchanged last month after an increase of 0.7 per cent in April. The Labour Department figures led to a rise in financial markets as traders believe the pressure on the Federal Reserve to raise interest rates has eased. The Dow Jones Industrial Index soared by just under 200 points to close at 10784.95 .
Annual inflation is running at two per cent - the lowest level since the 1960s. "There's simply no inflation in the US economy," said Mr Bruce Steinberg, chief economist with Merrill Lynch. "Core inflation is at the lowest level in about 35 years."
Core consumer prices rose at a 1.8 per cent pace through the first five months of 1999 - slower than last year.
Wall Street stocks rose in response to yesterday's report, which economists said reinstated uncertainty over the outcome of this month's meeting of the Fed's open market policy-making committee on June 30.
The benchmark 30-year US treasury bond jumped more than a full point, with its yield falling to 6.03 per cent from 6.08 per cent. The May CPI suggests the April data, which encouraged the Fed to adopt an official bias in favour of monetary tightening, may have been a blip and that inflationary pressures are still largely contained despite continued buoyancy of the US economy.
Today the spotlight will fall on Mr Alan Greenspan, the Fed chairman, as he testifies before Congress's Joint Economic Committee. Mr Greenspan has previously revealed his broad intentions a few weeks ahead of policy-making meetings.
Analysts continued to predict monetary tightening, but were reassessing its magnitude, timing and pace, many taking the view that expectations of an aggressive series of rate hikes have been misplaced.
