A new surge in energy prices pushed inflation higher in July, but other prices were more restrained, raising hopes on Wall Street that interest rates won’t be rising further.
The Consumer Price Index jumped 0.4 percent last month, double the June increase, the Labor Department reported Wednesday. But outside of energy and food, prices rose by just 0.2 percent, the smallest gain in five months.
That represented a second dose of good inflation news, following a report Tuesday that wholesale prices were up just 0.1 percent in July and, excluding food and energy, actually fell by 0.3 percent.
Two other reports Wednesday added to the view that a slowing economy could help to hold inflation in check.
The Federal Reserve reported that industrial production rose by 0.4 percent in July, just half the August gain, as manufacturing output slowed dramatically, reflecting the continued woes of U.S. automakers.
And the Commerce Department said new home construction dropped by 2.5 percent in July. It was the fifth decline in the past six months and pushed construction to a seasonally adjusted annual rate of 1.782 million units, the slowest pace since November 2004.
Building permits, considered a good barometer of future activity, dropped by a sizable 6.5 percent, a further sign that the five-year housing boom is now over.
Wall Street saw the combination of lower core inflation and a slowing economy as a sign that the Federal Reserve will not raise rates for an 18th time when the Fed meets again on Sept. 20.
But private economists said investors may be overreacting. Some predicted the Fed would raise rates at least once more this year in response to core inflation that has risen by 2.7 percent over the past 12 months, higher than the Fed’s 1 percent to 2 percent comfort zone.
“The economy, while cooling off, is not cooling off quickly enough to lower inflation pressures and satisfy the Fed,” said David Wyss, chief economist at Standard & Poor’s in New York, who predicted one more Fed rate hike.
Richard Fisher, president of the Dallas Federal Reserve bank, said Wednesday that the Fed’s next move remains an open question.
“If anybody tells you with absolute conviction that the Fed is done raising interest rates or with equal conviction that they have only paused and will raise rates again starting in September or October, remind yourself that at best — and I am being generous here — they are only guessing,” Fisher said in a speech to a Dallas business group.
Fisher said the Fed “will not tolerate inflation. But that doesn’t mean we need to take a sledgehammer to the economy.”
The Fed last week left a key interest rate unchanged, breaking a two-year string of uninterrupted rate hikes and raising hopes among investors that the central bank is about to end its credit tightening.
But key to that decision will be the performance of core inflation, which excludes food and energy. The Fed wants to determine whether the sizable increases in energy prices over the past two years are beginning to become a problem in other areas.
For July, core inflation rose by just 0.2 percent, after four consecutive increases of 0.3 percent. This slowdown reflected in large part a 1.2 percent decline in clothing prices, the biggest one-month drop in 18 years, reflecting heavy discounting by retailers to move unsold summer stock.
But energy prices continued rising, jumping by 2.9 percent in July, led by a 5.3 percent increase in gasoline prices.
So far this year, energy prices have risen at an annual rate of 25.3 percent, helping to boost overall inflation to an annual rate of 4.8 percent, compared with a 3.4 percent rise for consumer prices for all of 2005.
Crude oil prices hit a new record above $77 per barrel in mid-July and markets continued to be roiled by Middle East tensions and tight supplies. Motorists are feeling the pain at the pump with gasoline climbing last week to a nationwide record of $3.03 per gallon, according to the Lundberg Survey.
Food costs slowed to a 0.2 percent increase last month, reflecting declines in the cost of beef, poultry and vegetables.
Outside of food and energy, new car prices edged up just 0.1 percent, reflecting a new round of discounting by automakers trying to clear unsold cars, while airline fares jumped by 1.3 percent as airlines sought to pass on higher fuel costs.
American workers fell further behind to rising prices as average weekly wages, after adjusting for inflation, fell 0.1 percent, the fourth decline in the past seven months.