The U.S. continues to see low consumer inflation readings, which should allow the Fed to keep interest rates low.

The U.S. CPI rose 0.2% on the headline rate in June, putting its annual rate at 2.1%. The core rate was unchanged in the month, with annual core inflation running at 1.5%. The results were generally in line with expectations. “This morning’s report on U.S. consumer price inflation in June lent credence to Fed Chairman Greenspan’s comment in his testimony to Congress yesterday that the U.S. economy had reached ‘effective price stability’, says TD Bank, “albeit at very subdued levels that are likely to keep concerns about disinflation alive.”

BMO Nesbitt Burns says that the reading is lower than expectations, with downside surprises coming in tobacco, vehicles, hotels, and, technology equipment and information services.

“This is the trend that the Fed says can’t continue. The Fed wants core inflation to stabilize quickly and turn upward toward 2%. Implicitly, the Fed promises low (or even lower) short-term rates until that result happens. So, this report should be marginally helpful for short-term interest rates and might even take some steam out of the bond sell off, particularly if Greenspan brings lower core CPI to light in the reprised testimony today,” says Nesbitt.

CIBC World Markets says that while Greenspan considers deflation a “remote” risk, a 1.5% core inflation rate is the lowest quarter since 1966. And, TD says that today’s report provides little evidence that disinflationary pressures in the U.S. economy are abating.

Also, U.S. business inventories fell 0.2%, their first decline in more than a year. And, industrial production rose by just 0.1%, with capacity utilization at 74.3%. RBC Financial notes that capacity utilization has not been this weak since 1983. “Low capacity is the likely culprit behind the limited pressures on inflation in the U.S., but it may also limit the need for additional business investment – a key risk to our expectations for a lasting U.S. recovery going forward.”

TD says, “The combination is sure to keep alive speculation of further rate cuts from the Fed, particularly given the Chairman’s comment yesterday that ‘substantial further conventional easings could be implemented if the FOMC judged such policy actions warranted’.”

“A cooler core reading in June after an upward surprise in May, supports the story of a continued disinflationary trend in core prices. That should aid in our call for negative total CPI readings early next year as energy prices are compared to the war-inflated highs of early 2003. That prospect should help return some semblance of interest in treasuries if, as we expect, the nascent growth pick-up proves unsustainable,” concludes CIBC.