July Prices Up 0.2%, Smallest Rise of Year
The Labor Department reported Friday that consumer prices rose only 0.2% in July, the lowest monthly inflation rate this year, thanks to lower food prices and a steep 3.1% drop in the cost of natural gas.
For the first seven months of 1987, prices have risen at a 5% annual rate, the highest inflation pace since 1981.
At the same time, the nation’s huge trade deficit in June held economic growth last spring to an annual rate of 2.3%, a lower level than previously reported, the Commerce Department said.
The $15.7-billion deficit in merchandise trade reported last Friday was far worse than expected and forced analysts to cut growth projections for the gross national product by $5.5 billion for the second quarter, a reduction of 0.3 of a percentage point.
When the Commerce Department reported a month ago that the GNP for the April-June quarter grew at an annual rate of 2.6%, it projected trade figures based on statistics for April and May only and predicted that net exports in inflation-adjusted 1982 dollars would improve by $7.4 billion, after a $16.6-billion improvement in the first quarter.
The June trade figures, followed by reported higher petroleum imports for July, diminished hopes among some analysts that improving trade will lead to stronger growth later this year.
Trade ‘Disaster’
David Wyss of Data Resources Inc., a forecasting firm in Lexington, Mass., considers the June trade setback a “disaster” that should not be discounted. “It was all imports,” he said. “We are simply buying too much. There is no way to make good news out of that.”
“The June trade was a problem figure,” added Donald Ratajczak, director of the economic forecasting project at Georgia State University in Atlanta. “Trade keeps coming back to haunt us, and there are already reports of big oil imports in July, so the third-quarter figures may be bad also. But those reports are eventually going to have to improve.”
But David Levine of Sanford C. Bernstein & Co., New York investment bankers, noted that, in the short run, oil imports can be discounted from GNP reports. He said that the negative impact of higher imports is offset by the positive impact of larger inventory accumulation.
Surplus in Exports
By that measure, he noted, the second-quarter surplus of exports over imports was probably a respectable $5 billion instead of the reported $1.9 billion, assuming that oil imports were about $3 billion.
Monthly trade numbers are notoriously volatile, Levine added, compared to the more stable trend that can be read in a longer-term average calculated for three to six months at a time.
“You have to make a choice,” he said. “Trade had been improving quite substantially for two quarters. The June result suggests either that the earlier trend didn’t happen or that the trend will resume later and the trade results will be much better in the third quarter.”
For the time being, Levine said, he favors the second, more optimistic choice. “The trade improvement in the GNP reports has been going on too long, and it has been too logical in terms of the falling dollar, to discount. All you hear anecdotally from export industries suggests that it is improving.”
Exports Improving
After revision, the Commerce Department said, imports increased $9.6 billion in the quarter. But exports have improve steadily, up $11.5 billion in the spring.
Although he called the July consumer price index report “a pleasant surprise,” Levine warned that the steeper inflation in food, energy and medical services earlier in the year could begin to show up in steeper wage increases later in the year.
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. Gasoline prices at the pump continued to rise in July in the consumer price index, by 1.1%, down from 1.4% the month before, but natural gas prices dropped 3.1%.
Energy Price Surge
“The slowdown in the (consumer price index) indicates that the surge in inflation in the first half caused by energy prices, unless the confrontation in the Persian Gulf worsens, is behind us,” said Jerry Jasinowski, chief economist for the National Assn. of Manufacturers.
The consumer price index stood at 340.8 in July, compared to a base of 100 in 1967. This means that a cross section of consumer goods costing $100 in 1967 now costs $340.80.
In another report, the Commerce Department announced that after-tax corporate profits climbed 4.2% in the April-June quarter as American companies reaped benefits from the weaker dollar. The rise in profits represented a rebound from a sharp 3.7% fall in the first three months of the year, the department said. That decline was blamed in part on the initial impact of the new tax law, which imposed higher taxes on businesses.
