U.S. Consumer Prices Rose 0.1% in July; Core Rate Gains 0.2%
By Joe Richter
Aug. 15 (Bloomberg) -- Consumer prices in the U.S. rose 0.1 percent in July, the smallest gain in eight months, signaling the Federal Reserve may view inflation as less of a threat.
The increase in the cost of living followed a 0.2 percent advance in June, the Labor Department said today in Washington. Core prices, which exclude food and energy, climbed 0.2 percent and were up 2.2 percent from a year earlier.
The almost two-year housing slump and record fuel costs have weakened consumer spending, forcing retailers such as Wal-Mart Stores Inc. to cut prices to drum up business. A letup in inflation would give policy makers room to maneuver should the drop in stock prices and credit restrictions cause the economy to stumble.
``Price pressures are declining because of a slowing economy and higher interest rates, and I think those pressures will continue to ease,'' Lindsey Piegza, an analyst at FTN Financial in New York, said before the report. ``Inflation is still at the top of the Fed's range, so the Fed continues to downplay the declines because it wants to make sure.''
Economists forecast consumer prices would rise 0.1 percent, according to the median of 78 projections in a Bloomberg News survey. Estimates ranged from a decline of 0.3 percent to a 0.4 percent gain.
Consumers paid 2.4 percent more for goods and services in July from the same time last year, compared with a 12-mointh increase of 2.7 percent in June. The 12-month rise in core prices matched the prior two months as the smallest in more than a year.
Price Deceleration
So far this year, prices are rising at a 4.5 percent annual rate, compared with a 4.7 percent rise in the same period in 2006. Core prices are gaining at a 2.3 percent pace, compared with 3 percent in the first seven months of last year.
Today's report showed energy prices fell 1 percent, the most since January, after declining 0.5 percent in June. Gasoline prices dropped 1.7 percent.
Food prices, which account for about a fifth of the CPI, rose 0.3 percent after a 0.5 percent increase in June.
Housing costs, which include some energy costs and account for two-fifths of the total consumer price index, advanced 0.2 percent after rising 0.3 percent. Owner's equivalent rent, which makes up 30 percent of the core CPI, increased 0.2 percent for a second month.
Medical-care costs rose 0.6 percent after increasing 0.2 percent. Clothing prices climbed 0.4 percent following a 0.6 percent decline. Auto prices were unchanged for a second month.
Slower Spending
The jump in gasoline earlier this year and the housing recession has caused consumer spending, which accounts for more than two-thirds of the economy, to cool.
Lenders such as Wells Fargo & Co. and Wachovia Corp. are raising rates and imposing lending restrictions on some of their most creditworthy borrowers.
Some retailers have resorted to offering bigger discounts to lure buyers.
Bentonville, Arkansas-based Wal-Mart cut prices in July by as much as half on 16,000 back-to-school items such as notebooks and pencils. The world's biggest retailer yesterday said second- quarter profit rose less analysts anticipated and lowered its earnings forecast for the year.
Wal-Mart's Chief Executive Officer H. Lee Scott said Americans face ``difficult pressure economically.''
Almost 60 percent of the CPI covers prices that consumers pay for services ranging from airline fares to movie tickets and laundry charges.
Fed's Measure
The Fed's preferred inflation gauge, a core measure tied to consumer spending issued by the Commerce Department, was up 1.9 percent in June from a year earlier.
Some policy makers, including Ben S. Bernanke before becoming chairman, have said they would prefer the rate to be in a 1 percent to 2 percent range.
The Fed last week, in announcing it was holding its interest- rate target at 5.25 percent for a ninth time, acknowledged that financial-market turmoil and declines in housing had increased the risks to growth. Still, they maintained that inflation remained the biggest threat.
Increases in commodity costs and rising labor expenses may leave inflation close to the top of that zone even as the economy slows, economists said.
Some companies are still raising prices to recoup earlier cost increases.
Seattle-based Starbucks Corp., the world's largest chain of coffee shops, raised U.S. prices for lattes, Frappuccinos and other drinks by an average of 9 cents a cup in July to blunt higher costs for dairy, energy and coffee.
The CPI is the government's broadest gauge of costs because it includes goods and services. A report yesterday showed wholesale prices excluding food and fuel rose 0.1 percent, less than economists forecast.
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