Price Gains Off Sharply Last Month
Consumer prices rose 0.3% in June, the government reported Friday, a sharp slowdown from the previous month, bolstering expectations that the Federal Reserve will raise interest rates at a restrained pace.
Last month’s increase in the consumer price index from May’s level compared with a 0.6% surge in May caused mostly by higher gasoline prices, the Labor Department reported. Excluding volatile energy and food costs, “core” prices rose only 0.1% in June, less than expected by many economists and down from 0.2% in May.
Over the last 12 months, the CPI has increased 3.3%, and core prices have risen 1.9%. While both measures of inflation have generally accelerated in recent months, analysts said they remained within a comfort zone that should allow the Fed to boost short-term interest rates at what it has called a measured pace.
Last month, the Fed boosted its benchmark short-term rate for the first time in four years, to 1.25% from 1%. As long as inflation remains tame, many economists expect the central bank to continue raising rates in quarter-point increments over the next year or so. The next increase is expected when Fed policymakers meet Aug. 10.
“It is quite true there is an uptrend in inflation, but it’s not as bad as it looked earlier this year,” said Susan Hering, senior U.S. economist for UBS, a financial services firm. “It’s at a level that, in and of itself, is not troubling. The issue is not where it is, but where it’s going.”
UBS analysts expect the Fed to approve three increases of a quarter-point each the rest of this year, raising its benchmark rate to 2% by the end of 2004, Hering said. They anticipate more increases in 2005 until the rate reaches as high as 4%, a level considered “neutral” because it is believed to neither stimulate nor discourage growth.
Bigger and more frequent rate hikes could slow the economy and shake up financial markets, with possible political repercussions if they occurred before the November elections, analysts said.
The June CPI figures, following a report Thursday that wholesale prices retreated 0.3% last month, sparked a renewed decline in long-term interest rates.
The yield on the 10-year Treasury note fell Friday to 4.35%, the lowest level since mid-April, from 4.48% on Thursday. Other long-term interest rates, including those on mortgages, have declined recently as inflation anxiety has subsided.
Stock prices opened higher Friday after the release of the inflation data, but they later slipped amid concerns about slowing growth in the economy and in corporate earnings, and still-high oil prices.
The sharp uptick in the May CPI was largely attributable to spiraling energy prices, which shot up 4.6% that month. Energy prices rose 2.6% in June, accounting for roughly two-thirds of last month’s CPI increase. But some industry experts expect fuel prices to subside in the months ahead, reducing inflationary pressures.
Food prices, which jumped 0.9% in May, edged up 0.2% in June.
While last month’s moderate increases were a relief to some economists, inflationary pressure is clearly building as the economy continues to recover from the effects of the 2000 dot-com collapse, the 2001 recession and terrorist attacks, corporate accounting scandals and the Iraq war.
During the first six months of 2004, the CPI rose at an annual rate of 4.9%, sharply higher than the 1.9% increase for all of 2003. Core prices advanced at an annual rate of 2.6% during the first half of 2004, compared with 1.1% for all of 2003.
The recent price increases have contributed to a decline in inflation-adjusted wages. While consumer prices rose 3.3% over the last year, the average hourly wage increased just 2%.
“The persistently weak labor market has created a situation where wages are falling behind prices,” said Jared Bernstein, senior economist with the liberal Economic Policy Institute in Washington. “It’s not just because prices are growing faster, it’s also because wages are growing slower.”
An analysis by the institute noted that since the economy began growing again in November 2001, the inflation-adjusted average wage has declined 5 cents, to $15.64 last month. Inflation-adjusted weekly earnings have fallen to an average of $525.84 from $530.17 over the same period, the institute said.
