U.S. inflation remains in check

By Todd Eastham

WASHINGTON (Reuters) - Benign U.S. inflation numbers heartened wary investors as China and Japan offered cautiously upbeat views on recovery in their economies and U.S. President Barack Obama unveiled tough regulatory reforms aimed at avoiding any repeat of the global banking crisis.

There was comforting news in the U.S. consumer price report for those who fear Obama's massive stimulus spending and bank and auto bailout plans would heat up inflation, with prices rising a smaller than expected 0.1 in May as core CPI also rose just 0.1 percent, the smallest advance since December 2008.

Over the past 12 months, prices fell 1.3 percent, the largest year-to-year decline since April 1950.

Japan's government raised its assessment of the world's second biggest economy for a second month, while in China -- increasingly seen as an important engine of world economic growth -- the cabinet said it saw more positive signs.

But both Chinese and Japanese policymakers said recovery prospects were uncertain, a view echoed in Lisbon by European Central Bank policymaker Vitor Constancio.

"There are risks of a prolonged period of weak growth in developed economies," Constancio told a banking conference.

The contraction in global trade was highlighted by U.S. data showing imports and exports falling further in the first three months of this year, reducing the world's biggest current account deficit to its lowest level since the end of 2001, when the September 11 attacks shook the world economy.

LARGER FED ROLE