cpi from bloomberg

U.S. June Consumer Prices Rise 0.2%; Core Rises 0.3% (Update2)
July 19 (Bloomberg) -- Consumer prices in the U.S. increased for a sixth straight month in June and costs excluding fuel and food rose more than forecast, suggesting Federal Reserve policy makers will keep raising interest rates.

Prices paid by Americans rose 0.2 percent after May's 0.4 percent increase, the Labor Department said in Washington. Excluding food and energy, so-called core prices rose 0.3 percent for a fourth straight month and exceeded the 0.2 percent median estimate in a Bloomberg News survey of economists.

Treasury securities fell after the report, which showed inflation farther above the Fed's comfort zone. Core prices increased 2.6 percent from June 2005, the biggest year-over-year rise since 2002. The data come less than two hours before Fed Chairman Ben S. Bernanke presents his semi-annual economic report to Congress.

``It will be very hard for the Fed to retreat to the sidelines with this data today showing inflation is clearly worsening,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``Energy prices have been elevated for some time now and it appears that these costs are finally getting passed on through to the consumer. The Fed really has its work cut out for it.''

``Inflation pressures are picking up,'' Mike Moran, chief economist at Daiwa Securities America Inc. in New York, said before the report. ``Underlying conditions still carry inflation risk, with energy prices staying high and not much slack left in the economy.''

Core inflation has increased 0.3 percent for four straight months, the longest such stretch since January to April 1995. Medical care, rents and airfares all rose last month.

Treasury Market

The Treasury's benchmark 10-year note declined 1/4, pushing up the yield 3 basis points to 5.16 percent at 8:45 a.m. in New York. A basis point is 0.01 percentage point.

This will be the last consumer price index report policy makers will see before the Fed's next meeting Aug. 8. Some economists forecast policy makers to raise their target rate for overnight bank lending to 5.5 percent from 5.25 percent. Central bankers said in their June policy statement that ``some inflation risks remain,'' and more rate increases would depend on the outlook for growth and inflation.

A separate report from the Commerce Department showed that housing starts declined 5.3 percent last month to an annual rate of 1.85 million as higher mortgage rates discouraged buyers.

Weekly Earnings

Average weekly wages adjusted for inflation rose 0.6 percent in June, the most since November, a separate report from the Labor Department showed.

Energy prices fell 0.9 percent in June after rising 2.4 percent a month earlier. Gasoline prices decreased 1 percent.

Food prices, which account for about a fifth of the index, rose 0.3 percent in June after rising 0.1 percent.

Housing costs, which include some energy costs and account for one-third of the index, rose 0.2 percent after rising 0.2 percent. A category designed to track rental prices jumped 0.4 percent after rising 0.6 percent, which was the most since August 1990.

Rising rents, which account for almost 40 percent of the core CPI, are also boosting consumer prices. Renting has become more attractive as rising home prices and higher borrowing costs put houses out of reach for some. Improving demand and limited supply are making it easier for landlords to pass along rent increases, said Stephen Stanley, chief economist at RBS Greenwich Capital.

Airfares

Airfares rose 3.1 percent last month, today's report showed. U.S. airlines raised fares through June at the fastest pace since 2001 to help make up for higher fuel costs, according to the Air Transport Association, the industry's trade group

Southwest Airlines Co., the largest low-fare carrier, this month increased its highest one-way ticket price by $10 for the second time this year and raised the estimate of what it will spend for jet fuel.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets.

The cost of medical care rose 0.3 percent for a second month.

Today's report puts the three-month annual rate at 3.6 percent matching May's as the highest April 1995, according to Bloomberg News calculations.

Fed's Preferred Gauge

The Fed's preferred inflation gauge, the Commerce Department's personal consumption expenditures index excluding food and energy, usually grows just ``several 10ths'' of a percentage point less than consumer prices, said Ethan Harris, chief U.S. economist at Lehman Brothers. Bernanke and other policy makers have said 2 percent is the upper end of the range the central bank can tolerate.

Prices paid to U.S. producers rose at a faster rate in June on higher costs for food, energy and automobiles, the Labor Department said yesterday.

Following the producer prices report, traders saw a 70 percent chance the Fed will lift rates a quarter-point to 5.5 percent on Aug. 8, interest-rate futures showed.

Stronger demand in the U.S. and abroad for raw materials has driven up prices at the same time the economy is bumping up against labor and capacity constraints. Many companies are responding by raising prices to protect profit margins.

Steel Prices

The price of U.S. steel sheet rose to a 15-month high in June, according to Purchasing Magazine.

Lodging away from home increased 0.3 percent in June. Bethesda, Maryland-based Marriott International Inc., the biggest U.S. hotel operator, said second-quarter profit jumped 35 percent on increased prices and management fees.

``Demand is growing a lot faster than supply is growing,'' Marriott Chief Financial Officer Arne Sorenson said on a July 13 conference call.

While energy prices fell in June, helping cap increases in the consumer price index, crude oil costs that were still about a third higher than a year ago at the end of June are prompting some companies to charge more. This month, conflict in the Middle East has pushed crude oil to a record.

``There are some tendencies now towards greater inflation,'' former Federal Reserve Chairman Paul Volcker said in an interview. ``I wouldn't say it's out of hand, but we better not let it get out of hand.''

Slower Growth

Weighing against another interest-rate hike are signs that economic growth is slowing as fuel costs and a cooling housing market restrain consumer spending. That may make it tricky for policy makers to head off inflation without stifling economic expansion, some economists said.

The economy probably expanded at a 2.8 percent rate in the second quarter, half the 5.6 percent rate in the first three months of 2006 that was the fastest in more than two years, according to a Bloomberg survey of economists taken June 30 to July 10.

``We're well aware in the Fed that there is some risk that we would tighten more than necessary, that this might induce weakness in the economy,'' Fed Vice Chairman Donald Kohn said in response to a question after a speech in London on July 6. A potential jump in inflation ``could be even more disruptive.''

Automakers and retail stores offered discounts to lure consumers stung by higher interest rates and fuel costs, helping keep a lid on inflation in June. New vehicle prices declined 0.1 percent, and costs of clothing were unchanged in June.

Wal-Mart Stores Inc., the world's largest retailer, cut prices on about 500 products last month, Tom Schoewe, chief financial officer at the Bentonville, Arkansas based company.



To contact the reporter on this story:
Joe Richter in Washington [email protected].

Last Updated: July 19, 2006 08:51 EDT