Consumer Prices Record Largest Drop in a Year but Core Inflation Gains

Friday, 15 Jul 2011 08:48 AM

 

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The cost of living in the U.S. fell in June for the first time in a year as the biggest drop in energy costs since 2008 masked growing inflation in other goods and services like autos, clothing and hotel rates.

The consumer-price index decreased 0.2 percent, compared with the 0.1 percent drop median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.3 percent for a second month, more than forecast and the biggest back-to-back gain in three years.

Cheaper fuel removes some of the “temporary” stresses Federal Reserve Chairman Ben S. Bernanke said hurt spending among households burdened by slowing job growth and 9.2 percent unemployment. At the same time, the prior jump in raw-material costs keep rippling though the economy, one reason Federal Reserve policy makers are divided on their next action.

“The trend is very clear, and it’s toward higher inflation,” Conrad DeQuadros, a senior economist at RDQ Economics LLC in New York, said before the report. “Core prices are being pushed higher. I don’t see how a strong case can be made for the rise in inflation to be transitory. We’re going to see inflation pick up further this year.”

Forecasts for consumer prices in the Bloomberg survey of 80 economists ranged from declines of 0.3 percent to gains of 0.2 percent. Economists projected the core gauge would rise 0.2 percent, according to the survey median.

Core Accelerates

The last time prices excluding food and fuel rose 0.3 percent for two straight months was in June and July 2008.

Overall prices increased 3.6 percent in the 12 months ended June, the same as the year-over-year gain in May. The core CPI rose 1.6 percent from June 2010, the most since January 2010.

Energy costs decreased 4.4 percent from a month earlier, the biggest decline since December 2008, today’s report showed.

Food costs climbed 0.2 percent, the smallest advance this year.

Apparel costs jumped 1.4 percent in June, the biggest surge since March 1990. Lodging away from home, which includes hotel rates, soared 3 percent after a 2.9 percent gain in May. The cost of a new car increased 0.6 percent.

It’s too early to predict how consumers will react to increased prices, according to Levi Strauss & Co. Chief Financial Officer Blake Jorgensen. Levi Strauss, the closely held maker of blue jeans and Dockers pants, boosted prices in the first three months of the year as cotton costs soared.

Clothing Prices

“We haven’t seen the full impact of apparel prices on the consumer,” Jorgensen said in a July 12 call with analysts. “When you combine that with some of the continued pressure with the consumer on general products, food, gas, commodities that they are experiencing and no job growth, we’re still cautious here in the U.S.”

Bernanke told Congress this week that “most of the recent rise in inflation appears likely to be transitory.” Stabilization of oil prices and other commodities, along with slack in the labor market, indicates inflation will moderate, Bernanke said.

The rise in prices came as U.S. economic growth cooled, leaving Fed officials divided on whether the economy needed additional stimulus, minutes of the central bank’s June 21-22 meeting showed earlier this week. Some members said a further slowdown in the recovery would signal a need for more support, while others said the growing risk of inflation would require withdrawing stimulus sooner than currently anticipated.

Bernanke yesterday told Congress that the central bank isn’t currently ready to embark on a third round of government bond-buying to stimulate the economy.

Fed’s Goal

Fed policy makers aim for long-run overall inflation of 1.7 percent to 2 percent, according to their June forecast. Their preferred price gauge, which excludes food and fuel, rose 1.2 percent in May from a year earlier.

The CPI is the broadest of three monthly price measures from the Labor Department because it includes goods and services. About 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

A Labor Department report yesterday showed the producer- price index fell 0.4 percent in June, while the cost of goods excluding fuel and food rose 0.3 percent. Import prices in the U.S., reported July 13, dropped 0.5 percent from the prior month as oil and food expenses retreated.

© Copyright 2014 Bloomberg News. All rights reserved.

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