Low Food, Gas Costs Hold Inflation to .2% : Trade Woes Hold Economic Growth to Slow 2.3% Rate

A dip in food costs and moderating energy prices held inflation at the retail level to a tame 0.2% increase in July, its best performance this year, the government reported today.

The rise in the Labor Department’s consumer price index was half the 0.4% increase posted in June. Analysts cited the report as further evidence that inflation is calming again, at least temporarily, after a spurt in the first half of the year.

It was the lowest one-month rate since a similar 0.2% increase last December.

Food and beverage prices, which had increased 0.7% in June, did a turnaround and fell 0.2% in July, paced by a 0.5% drop in grocery prices. Energy prices were up a moderate 0.5% after rising 1.5% in June.

Economy Grows 2.3%

In another report, the Commerce Department said the nation’s economy grew at a modest annual rate of 2.3% from April to June. That represents a downward revision from the 2.6% increase in the gross national product for the same quarter reported initially. The revision was almost entirely due to an unanticipated worsening of the U.S. trade deficit in June.

Economists said the reports demonstrate that inflation is low and the economy weak, making it unlikely that the Federal Reserve will act at this time to tighten credit, such as raising key interest rates, in an effort to prevent further declines in the value of the dollar.

“The outlook for the economy is for slow growth, not fast growth and not no-growth, not a recession,” said Donald Straszheim, chief economist for Merrill Lynch.

More Inflation Seen

Straszheim said the July inflation figure was “good news, but I don’t think it is time to do much celebrating.” He said a further weakening of the dollar on foreign exchange markets will inevitably contribute to higher import prices and more inflation in the months to come.

The July increase in consumer prices, computed on an annual basis, was equivalent to a 2.9% rate of inflation.

However, the drop in food prices that provided the major restraining element in the July price activity was not expected to persist. Most analysts predict that inflation will hover around 4% for the rest of the year.

Energy Fueled Early Rise

From January to July, consumer prices have increased at an annual rate of 5%--the fastest clip since 1981 and dwarfing last year’s 1.1% rate. However, much of this year’s inflation came from rebounding energy prices earlier in the year.

Gasoline prices at the pump continued to rise in July, by 1.1%, down from 1.4% the month before. Heating oil was up 1.2% and electricity 0.1%. But these increases were partially offset by a 3.1% drop in the price of natural gas.

July’s drop in food prices included a 3.6% decline in the prices of fruits and vegetables. The index for meats, poultry, fish and eggs rose a moderate 0.3% in July, sharply down from the double-digit rates recorded in May and June. Dairy products were down 0.2%.

July’s increase brought the consumer price index to 340.8, meaning that goods which cost $10 in the 1967 base period cost $34.08 in July, up from $32.80 in July, 1986.