Consumer prices rise in August on higher gas prices

The nation’s factories have boosted their output for two straight months, providing the latest evidence that an economic expansion is probably underway.

Industrial production rose 0.8% in August, the Federal Reserve said Wednesday, after a 1% increase in July that was the first advance since October 2008.

The latest report is among the strongest signs that the economy made a shift in the summer from contraction to expansion, at least as measured by gross domestic product.

The industrial sector operated at 69.6% of its capacity in August, up from 69% in July. That reflects more idle factories being put back to work.

The stock market rallied on the solid economic data, marking its eighth increase in nine trading days.

The Dow Jones industrial average jumped 108.30 points, or 1.1%. The broader Standard & Poor’s 500 index rose 1.5% and is up 7.4% since Sept. 2.

The improved industrial numbers reflect in part General Motors Co. and Chrysler plants coming back on line after a long hiatus. But more broadly, they reflect an emerging trend in the economy: Business inventories are now so low for a wide range of goods that factories must ramp up production just to keep up with demand.

The open question, economists said, is whether, or how much, that positive trend will spread across the economy, and whether it will continue much beyond the summer. With retail sales holding up well, according to August numbers released earlier in the week, signs are reasonably good.

But that momentum could prove fragile.

“Another jolt to consumer confidence would quickly knock the legs out from under auto sales and leave automakers backpedaling from fourth-quarter production schedules,” said Stuart Hoffman, chief economist for PNC Financial Services Group.

Among other economic data released Wednesday, there was a mixed picture on inflation.

The Labor Department said that consumer prices rose 0.4% in August, as measured by the consumer price index. That reflected a 4.6% rise in energy prices, with a particular boost in the cost of gasoline, which rose 9.1%.

However, excluding the volatile food and energy categories, prices rose a modest 0.1%, consistent with the view, widespread among economists, that inflation doesn’t represent much of a threat in the near future, given that the economy is operating well below full capacity.

“Inflation is a potential threat, but for some way down the road, not today,” said Nigel Gault, an economist at IHS Global Insight.

The numbers were especially distorted by purchase subsidies under the government’s “cash for clunkers” program.

Prices of new cars fell 1.3% on average, which was less than many analysts had predicted.

Used-car prices, meanwhile, rose 1.9%, as the dramatic decline of auto pricing from the deepest period of the recession appeared to recede.

Apparel prices fell 0.1%, food prices rose 0.1%, and prices for medical services were up 0.2% over July levels.

But even though serious inflation doesn’t seem to be on the horizon, the numbers give little evidence of deflation, a devastating spiral of falling prices. The steep price declines of fall 2008, when the economy was in a near free fall, appear to have abated across a wide range of goods and services.

Also Wednesday, the Commerce Department said the broadest measure of the nation’s trade deficit narrowed in the second quarter as the country’s imports declined more than its exports.

Called the current account deficit, the shortfall in U.S. exports and investment income from abroad relative to imports and investment returns paid to foreigners shrank to $98.8 billion from $104.5 billion in the first three months of the year.

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Irwin writes for the Washington Post.