Fed Watchers Are Soothed by July Economic Reports
U.S. consumer prices rose more slowly in July and the pace of new-home construction was the smallest in 2 1/2 years, the government reported Wednesday.
The reports are the latest evidence of both tame inflation and cooler economic growth, which analysts believe will prompt the Federal Reserve to leave interest rates unchanged next week.
The consumer price index rose 0.2% last month after a 0.6% June increase, the Labor Department said. Housing starts fell 3.3% to an annual rate of 1.512 million units, the third-straight decrease and the slowest pace since November 1997, the Commerce Department said.
“The boom in housing looks to be over, and that should signal an easing in growth” in other areas of the economy, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. What’s more, he said, “inflation remains well enough under control that the Fed will be under no pressure to do anything” when Fed policymakers meet Tuesday.
Central bankers are expected to do next week what they did in June. At that meeting they held the overnight bank lending rate at a nine-year high of 6.5%, saying the economy was showing tentative signs of slowing and inflation still posed a risk.
The core rate of the CPI, which excludes food and energy costs, also rose 0.2% in July--the fourth-straight month at that pace. The cost of food, housing and medical care increased, while clothing prices fell. Outside that decline and a drop in the cost of gasoline, prices for other consumer goods generally rose.
Through July, the overall CPI rose at a 4% annual rate, compared with a 2.4% increase during the first seven months of 1999. The core rate increased at a 2.6% annual rate through July, compared with a 1.9% rate of increase in the first seven months of last year.
Energy prices, which account for about a tenth of the index, rose 0.1% in July, compared with a 5.6% surge in June. A decrease in the cost of gasoline was offset by increases for fuel oil, electricity and natural gas.
The cost of gasoline at the pump was as low as $1.51 in July after reaching a record high of $1.71 a gallon in the week ended June 19, according to Energy Department statistics. The price was down to $1.49 this week.
Food prices, which account for about a fifth of the index, rose 0.5% in July after rising 0.1% the month before. The increase was led by higher costs for fruits, poultry and dairy products. Clothing costs fell 1% in July, the fourth-consecutive monthly drop and the biggest drop since a 1.1% decline in January. One reason is that retailers, including AnnTaylor Stores Corp., marked down prices on spring and summer clothing to make way for fall fashions.
In other categories, medical care costs and prescription drug prices increased. Housing costs, which represent about a third of the index, increased 0.4%.
Transportation costs fell 0.3% in July as travelers benefited from competition. US Airways Group Inc., the sixth-largest carrier, sparked a price war last month by cutting some U.S. and Canadian fares as much as 45%, spurring other major U.S. airlines to also offer discounts.
In the meantime, the decline in July new-home construction was led by a 2% drop in starts of single-family homes to the slowest pace since December 1997. Construction of new housing plunged 14.3% in the South, the only region where starts declined.
Wednesday’s housing report also showed building permits, a gauge of future construction, fell 2% to a 1.497-million rate in July, the lowest since December 1997.
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Consumer Price Index
Monthly core rate percentage change, seasonally adjusted:
July: 0.2%
Source: Bureau of Labor Statistics
