Gas Prices Boost Consumer Inflation

A gasoline attendent pumps gas in Beaverton, Ore., Wednesday, April 19, 2006. Consumer prices shot up in March, reflecting higher costs for gasoline, clothing and hotel rooms, with core inflation rising by the biggest amount in a year. (AP Photo/Rick Bowmer) AP Photo/Rick Bowmer

Consumer inflation accelerated in July as a big jump in gasoline and other energy prices offset the biggest decline in clothing costs in nearly two decades.

The Labor Department reported Wednesday that its closely watched Consumer Price Index rose by 0.4 percent last month, double the 0.2 percent increase in June. While energy costs had fallen in June, they rose by 2.9 percent last month, the biggest increase in three months.

Core inflation, which excludes food and energy, slowed in July, rising by just 0.2 percent after four straight months of 0.3 percent gains. This slowdown, which was helped by a 1.2 percent drop in clothing prices, was likely to encourage officials at the Federal Reserve, who are counting on a slowing economy to reduce inflation pressures.

Financial markets staged a big rally on Tuesday after the government reported that core inflation at the wholesale level actually fell by 0.3 percent in July.

Investors are hoping that the Fed will not feel the need to push interest rates any higher to slow inflation. Last week, the central bank left rates unchanged, breaking the longest run of uninterrupted rate increases in Fed history.

In other economic news, the Commerce Department reported that construction of new homes fell in July for the fifth time in the past six months, providing further evidence that the once-booming housing market is slowing.

The Commerce Department reported Wednesday that homes were being built at a seasonally adjusted annual rate of 1.795 million units in July, down by 2.5 percent from the June construction pace.

It was the slowest building pace for new homes since November 2004 and provided further evidence that the housing industry, after enjoying five boom years, has slowed substantially this year under the impact of rising mortgage rates.

The 0.4 percent rise in consumer prices in July was the largest increase since a similar 0.4 percent rise in May. Through July, consumer prices have been rising at an annual rate of 4.8 percent, up from a 3.4 percent rise in consumer inflation for all of 2005.

The faster pace of price gains reflected a relentless surge in energy prices, which have been rising this year at an annual rate of 25.3 percent, up from last year's gain of 17.3 percent.

Crude oil prices hit a record of $77.03 per barrel on July 14, reflecting rising tensions in the Middle East and increased demand for energy from developing countries such as China.

For July, gasoline prices jumped 5.3 percent, the biggest gain since April. Analysts warned that further increases were in store for motorists. Nationwide gasoline pump prices hit a record $3.03 last week.

Home heating oil was up 3.1 percent in July but electricity prices for home use edged up just 0.1 percent and natural gas prices were unchanged.

Food costs rose by 0.2 percent last month, compared to a 0.3 percent rise in June. The slower price increase reflected declines in the cost of beef, poultry and vegetables.

Excluding food and energy, the 0.2 percent rise in core prices left this category rising at an annual rate of 2.7 percent, still above the 1 percent to 2 percent Fed comfort zone.

The slowdown in core inflation last month reflected a 1.2 percent decline in clothing costs, the biggest drop in this category since a 1.4 percent plunge in August 1988.

With inflation increasing in July, inflation-adjusted weekly earnings fell by 0.1 percent, the Labor Department said in a separate report.
  • Melissa McNamara

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