The steepest decline in gasoline prices in more than four years helped keep inflation in check last month, while sluggish retail sales suggested consumers are showing caution.
The Labor Department said Friday that consumer prices rose a tame 0.2% in July, compared to 0.1% the previous month. For the year so far, the consumer price index is advancing at a 3.1% annual rate, not much worse than the 2.7% increase for all of last year.
The government also reported that retail sales, after two strong months, fell 0.1% in July. While air conditioner sales provided a boost, a 1.7% drop in car buying led the downturn.
In the greater Los Angeles area, consumers paid a bit less for goods and services in July than June, the government said, and prices on average were just 1.8% higher than in July, 1994. Sam Hirabayashi, the regional commissioner for the Bureau of Labor Statistics in San Francisco, said housing, transportation and food and beverage costs all fell in the five-county region, which includes Los Angeles, Orange, Riverside, San Bernardino and Ventura counties.
Stocks and bonds both popped higher early Friday but quickly lost ground as analysts sifted through the economic reports. The Dow Jones industrial average slid 25.36 points to close at 4,618.30. Bond prices fell and pushed the yield on the 30-year Treasury bond up to 6.97% from 6.94% on Thursday.
“Consumers remain constrained by sluggish income growth, high debt and low savings,” said Bruce Steinberg of Merrill Lynch & Co. “Inflation is simply not a problem.”
Many analysts expect the economy to pick up as the year progresses. Growth came to a virtual halt in the second quarter, which ended June 30.
The Federal Reserve Board, after helping engineer the slowdown with seven straight increases in interest rates, reversed course in July and cut a key rate for the first time in nearly three years.
Analysts said benign inflation reports and weak spending give the Fed room to cut again. But they predicted that central bank policy-makers will remain on the sidelines at their Aug. 22 meeting and wait at least until September before acting again.
While the cost of living has picked up a bit from last year, the data has been encouraging lately.
The Labor Department said that, excluding the volatile food and energy costs, consumer prices still rose just 0.2% last month. That increase in the core inflation rate is identical to that of the previous two months.
The government reported Thursday that plunging gasoline and energy costs helped hold wholesale prices steady in July. And analysts said a drop in the prices of raw materials could mean even less inflationary pressure ahead.
“Inflation usually moderates when the economy slows down,” said Michael Evans, head of an economic forecasting service in Boca Raton, Fla. “It’s not reasonable to assume the economy is picking up again.”
The economy has been expanding for more than four years, accompanied by the best string of inflation reports in three decades.
Gasoline prices at the pump fell 2.1% in July, the steepest decline since they plunged 4.6% in March, 1991. Analysts said abundant supplies have led to falling crude oil prices.
Overall, energy costs fell for the first time in four months, dipping 0.8%, the largest drop since a 0.9% slide in May, 1994.
Food prices, led by beef and veal, rose 0.2% in July, compared to 0.1% in each of the previous two months. Tomato prices soared 12.6%, the largest increase in three months. But the price of lettuce plummeted 19.9%, after diving 38.8% in June.
Airline fares fell 1.3% last month, the biggest decline since a 3.2% drop in December.
But health care costs climbed 0.4% and have risen at a 3.8% annual rate this year.
Transportation costs slipped 0.4%, including a 0.1% dip for new cars; automobile finance charges fell 2.3%; tobacco prices were unchanged, and housing costs rose 0.3%.
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Consumer Price Index
A sharp drop in gasoline prices helped keep the consumer price index in check. Percentage change, month to month, seasonally adjusted:
July 1995: 0.2%
Source: Labor Department