Tuesday, Aug. 17, 2004 | 10:49 a.m.
BLOOMBERG NEWS
WASHINGTON -- U.S. consumer prices unexpectedly declined in July, underscoring the Federal Reserve's view that accelerating inflation earlier this year may prove temporary. Industrial production rose and home construction increased more than forecast.
The 0.1 percent decrease in the consumer price index compares with a 0.3 percent increase in June, the Labor Department said today in Washington. The core rate, which excludes food and energy, rose 0.1 percent for a second month.
"The inflation figures give the Federal Reserve reassurance their measured pace is appropriate," said John Ryding, chief U.S. economist at Bear Stearns & Co. in New York.
The inflation report suggests companies are keeping a lid on prices to help boost sales, economists said. At the same time, the increases in homebuilding and business spending on equipment show the economy may speed up after the weakest quarter for economic growth in more than a year.
Housing starts rose 8.3 percent in July to an annual pace of 1.978 million new units, the Commerce Department said today. Economists predicted a rise to 1.898 million, based on the median estimate in a Bloomberg News survey. Production at the nation's factories, mines and utilities increased 0.4 percent, led by a 0.6 percent rise in manufacturing. Business equipment production jumped 1.5 percent.
"Housing is on fire, and the soft patch in production is behind us," said Richard Yamarone, chief economist at Argus Research Corp. in New York.
"With inflation pressures abating and the economy slowing down, there are some who feel the Fed won't need to raise rates" at every meeting this year, said Sharon Lee Stark, chief fixed-income strategist at the brokerage and capital markets arm of Legg Mason Inc. in Baltimore.
Economists expected consumer prices to rise 0.2 percent, according to the median of 68 forecasts in a Bloomberg survey. The core index was also forecast to increase 0.2 percent, according to the survey median.
The average weekly earnings of U.S. workers after adjusting for inflation rose 0.7 percent in July, after falling 0.8 percent the month before, the department said. The consumer price index was up 3 percent from July of last year. Excluding food and energy, it rose 1.8 percent from July 2003.
Fed policymakers last week increased the target rate for overnight loans between banks to 1.5 percent from 1.25 percent. In acknowledging the recent acceleration in prices, the central bankers said that the increases reflected "transitory factors" and that they believed inflation would remain "relatively low." For that reason, they could afford to boost rates at a "measured" pace.
Today's report reinforces the Fed view, Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said. "But good CPI numbers alone will not stop rates rising slowly," he said.
So far this year, consumer prices are rising at a 4.1 percent annual rate, compared with a 2.1 percent increase at the same time a year ago. Core prices are rising at a 2.4 percent rate, up from 1.3 percent in the first seven months of 2003.
Energy prices, which account for about a 14th of the index, fell 1.9 percent in July, the first decline since November, after a 2.6 percent increase the month before. Gasoline prices last month fell 4.2 percent, the biggest drop since prices fell 5.1 percent in November, after a 3.1 percent rise in June.
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