Inflation Data Bode Well for Economy

A report Friday showing tame consumer inflation, coming amid falling energy prices, raised hopes that the economy may be entering a “soft landing” of moderate growth without recession.

If that happens, it could be because of consumers like Ellen MacArthur.

She and her husband, David, cut back on running errands in their suburban South Florida community when gasoline prices shot up earlier this year. But as pump prices dropped in recent weeks, MacArthur started running weekend errands again, even stopping for lunch along the way. And she notices she’s not alone.

“There are much more people out there now,” MacArthur, 44, said. “During the week, even at night, you pass by restaurants and there was a time they would seem kind of empty. And they’re full now.”

Economists say the recent drop in oil prices has the potential to boost consumer spending, giving the economy a lift and at least partly offsetting the negative effect of a weakening housing market.

Energy prices rose just 0.3% in August, down sharply from a 2.9% boost in July, the Labor Department reported Friday as part of an overall report that showed the consumer price index rising 0.2% in August versus 0.4% in July. The subdued overall inflation was helped by slower price rises for energy, transportation, recreation and housing.

The core consumer price index, which excludes volatile energy and food prices, rose 0.2%, the same increase as in July but down from 0.3% increases in the previous four months.

Overall consumer prices rose 3.8% in the 12 months ended in August, down from 4.1% for the July period. Core prices rose 2.8% in the last 12 months, compared with 2.7% for the 12 months ended July.

The average retail price of regular gasoline fell from $3.04 a gallon Aug. 7 to $2.62 a gallon Sept. 11 and is expected to average $2.55 a gallon by January, according to a report Tuesday by the Energy Information Administration. Natural gas prices are lower this year compared with last year and are expected to remain lower this winter.

Analysts say the possibility that inflation may be peaking suggests that the Federal Reserve’s campaign to raise interest rates could be succeeding. The Fed paused last month after raising rates 17 consecutive times in two years. Fed watchers predict that the central bank will hold off on raising rates at its meeting Wednesday.

“All of these numbers seem to be falling right in with the Fed’s tightening path,” said Michael Englund, principal director of Action Economics in Boulder, Colo.

Consumer sentiment has been buoyed by falling pump prices, said T.J. Marta, a strategist with RBC Capital Markets in New York. RBC said Friday that its index of consumer confidence rose to 93.7 this week from 74.8 in August. The University of Michigan said Friday that its index of consumer sentiment rose by 2.9% in September, the first increase in two months. It included a 13.4% monthly gain in consumers’ expectations of future economic activity.

“Falling gas prices have a profound effect on consumer psychology,” said University of Maryland economist Peter Morici. “Everyone knows how important oil is and it’s the one statistic that is continually before their eyes. Men don’t buy clothes once a week and not everyone buys food once a week. But it’s a communal thing: Almost everyone buys gas.”

Kevin Sugarman, 27, commutes in his pickup truck 98 miles a day from San Jose to his job at a public relations firm in Alameda, Calif. With lower gasoline prices, he started taking his second car -- a Toyota sports utility vehicle -- out for weekend spins to the beach, ballparks and Bay Area restaurants.

“It doesn’t seem that huge, but when you’re driving that much it matters,” he said of the price change.

As consumer spending increases, Morici predicts that economic growth will pick up in coming months from an annualized rate of 2.9% in the second quarter to 3.1% for the rest of this year and 3.4% next year. “We’re accomplishing a soft landing. Today’s inflation numbers are really great news and we’re going to continue to see good numbers in September and October,” Morici said.

Marta, the RBC strategist, was less optimistic. Given the weak housing market, particularly in regional markets such as California, it’s “a close call.” He predicts annualized growth of 2.3% for the rest of the year and 2.5% to 2.7% next year.

“I think the consumer has benefited from the lower oil prices during the past few weeks, but we’re near the bottom of the range for gas and oil” prices, Marta said.

Also, wage growth appears to be mixed, making it uncertain how much it will boost consumers’ spirits. Inflation-adjusted hourly earnings fell in August and were flat over the last 12 months, but average weekly earnings, adjusted for inflation, were up 0.3% in August, the Labor Department said Friday.

Businesses, once reeling from higher fuel prices, are also finally reaping some savings. But another report Friday showing that industrial output fell unexpectedly by 0.1% last month, the first decline since January, suggested businesses are still cautious.

Stevens Manufacturing Co. in Milford, Conn., expects to save on delivery of its aircraft parts as well as on heating fuel costs as the fall chill begins.

Company President Stephen Fogler, 46, lives on the shore of nearby Long Island Sound and has noticed that as gas prices fell, more boaters showed up at the marina and at local stores.

As “people spend less putting gas into their cars, they spend more at the mall,” he said.

Morristown Drivers’ Service, a trucking company based in Morristown, Tenn., employs 173 drivers and plans to invest fuel savings back into the business, said Jerry Malone, vice president of safety and personnel.

But the decline in gas prices could also stretch trucking companies if retail orders pick up in anticipation of increased holiday spending, said Bob Costello, chief economist for the American Trucking Assns. The next few months are a busy freight season, and the long-haul, heavy-duty truck industry alone faces a national shortage of 20,000 drivers, Costello said.

“The key for us is how much they think consumers are going to spend,” he said.

Economist Englund said falling gas prices could jump start major purchases, especially autos, because new car prices fell 0.1% in August. Prices remained 1% higher than a year earlier.

Last year, David and Ellen MacArthur traded in their Ford SUV for a smaller Hyundai Santa Fe that gets about 11 more miles to a gallon.

Since gas prices started to fall this month, David MacArthur has noticed signs at local car dealerships advertising $5,000 to $10,000 markdowns on SUVs. He expects his neighbors in Port St. Lucie, Fla., to start buying soon.

“I think people are still waiting to see if gas will go down a lot,” he said. “We’ve got hope.”

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molly.hennessy-fiske@

latimes.com