Consumer Price Index Dips 0.1% on Fuel Costs

A sharp drop in gasoline prices took the sting out of inflation last month, the government reported Tuesday, but analysts said volatile energy costs still posed an economic threat.

The Labor Department said its consumer price index fell 0.1% in July, the first decline since November. July’s dip followed increases of 0.6% in May and 0.3% in June, fueled largely by rising pump prices. Although economists expected price pressures to ease last month, the outright decline took most by surprise.

The sense of relief may prove fleeting, however, some economists cautioned. Consumer price inflation is running at an annual rate of 4.1% this year, far above last year’s 1.9%. With crude oil prices setting records in recent days, analysts said the CPI was likely to resume its upward march this month.

“Energy prices are a huge wild card,” said Bill Cheney, chief economist at MFC Global Investment Management in Boston. “A $10 change in the price of oil siphons off tens of billions of dollars from the U.S. economy. From a national perspective, it’s a pure loss.... It’s the equivalent of a big tax increase or an interest-rate hike.”

So far, economists said, spiking energy prices have not triggered a wage-price spiral in which workers press for higher pay to compensate for rising prices at the gas pump and grocery store.

That’s because the U.S. labor market remains relatively weak, and the higher prices have been limited largely to the energy sector, analysts said. Overall, energy prices jumped 4.6% in May and 2.6% in June, before retreating 1.9% last month. Gasoline prices plunged 4.2% in July after advancing 8.1% in May and 3.1% in June.

Excluding the erratic food and energy areas, “core” prices as measured by the CPI rose 0.1% in July, the same as in June. Core inflation has been running at an annual rate of 2.4% so far this year, compared with 1.1% in 2003.

“We had what appeared to be a tumor, then we found out it was benign,” said Lehman Bros. Senior Economist Drew Matus in New York. “We all got concerned when there was that spike up and inflation looked horrendous. Now inflation looks much more tame.”

Still, the increase in consumer prices has sapped the earning power of American workers. Over the 12 months ending in July, average weekly earnings fell 0.7% after adjusting for inflation, the Labor Department said in a separate report.

For just the month of July, average weekly earnings posted a 0.7% gain. Without last month’s plunge in energy prices, the 12-month record would have been twice as bad.

“President Bush keeps insisting that we are turning the corner, but ... when it comes to wages, we’re turning the corner the wrong way,” said economist Gene Sperling, an advisor to Democratic presidential nominee Sen. John F. Kerry, in a conference call with reporters. “Most families are having to run even harder just to keep from falling behind.”

The Bush campaign countered by trumpeting the one-month gain in inflation-adjusted wages and citing other statistical indicators suggesting that American workers were better off than when the president took office.

Government reports “show worker pay has increased under the Bush administration,” the campaign said in a prepared release.

Economists said the CPI report was unlikely to alter the Federal Reserve’s policy of raising short-term interest rates at a “measured” pace to keep inflationary pressures in check.

Last week, in its second quarter-point increase in two months, the Fed boosted its key short-term rate to 1.5%. It signaled more such increases in the months ahead.

Other economic indicators released Tuesday provided mixed signals.

Construction of new homes and apartments jumped 8.3% in July, surpassing analysts’ expectations and suggesting that the housing sector remained robust. But industrial production rose 0.4% in July, somewhat less than anticipated.

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Times staff writer Matea Gold in Ketchum, Idaho, contributed to this report.