Consumer inflation holds fast in June
WASHINGTON (AP) – Consumer prices in June were well-behaved for a second month, while consumer spending revved up overall economic activity. Two government reports released Thursday showed that inflationary pressures were contained in June. At the same time, consumers hit the shopping malls and dealer showrooms, spurred by the start of summer and attractive auto incentives.
The Labor Department said the Consumer Price Index was unchanged in June, compared with decline of 0.1 percent in May. That had been the first outright drop in 10 months.
The spotty performance over the past two months came from sharp declines in gasoline and other energy products, and helped to ease fears about that inflationary pressures might be mounting.
Analysts cautioned that the good news on energy will not last. Crude oil prices surged to record levels above $61 per barrel and gasoline pump prices jumped 10 cents last week, to a nationwide record of $2.33 per gallon.
While they expected the overall inflation figure to show increases in July, analysts predicted that the core inflation rate, which excludes energy and food, would be much better behaved.
It is this rate that is closely watched by the Federal Reserve for any indications that surging energy costs are threatening to break out in broader based inflationary pressures.
Overall inflation has been on a roller coaster this year. It rose rapidly from February through April as energy prices soared. But the core inflation rate has proved remarkably stable. In June, it rose 0.1 percent, the same rate as a month earlier.
As evidence of a solid recovery, the government reported Thursday that retail sales increased by 1.7 percent in June, nearly double what forecasters had expected.
The strength came from a 4.8 percent gain in auto sales, the strongest in 13 months. General Motors, followed by other automakers, brought back attractive incentive offers.
Sales at department stores, specialty clothing stores and furniture stores also were positive.
Analysts said the hot weather in June, after an unusually cool May, helped spur sales of warm-weather clothes and other summer items. Retail sales had fallen 0.3 percent in May.
“After buying their new vehicles from GM, happy consumers drove to the malls and spent all their savings,” said Joel Naroff, chief economist at Naroff Economic Advisors, a consulting firm in Holland, Pa.
Consumer spending accounts for two-thirds of total economic activity. Analysts said the combination of strong consumer spending and low readings on core inflation should be welcome news at the Federal Reserve.
“The Fed should be very happy with inflation remaining low and well contained this far into an economic expansion,” said Mark Zandi, chief economist at Economy.com, a consulting firm. “We are closing in on an almost picture-perfect economy.”
Zandi said that reports of a narrower-than-expected trade deficit for May and the strong rebound in retail sales were leading him to revise his estimate for overall economic growth in the April-June quarter from 3.2 percent to closer to 3.5 percent. The economy expanded by 3.8 percent in the first quarter.
In other economic news, the number of people filing new claims for unemployment benefits rose to 336,000 last week. That was a gain of 16,000 from the previous week, as auto plants laid off workers temporarily to retool for the new model year.
For June, energy prices fell by 0.5 percent following an even bigger 2 percent drop in May. Last month, gasoline prices dropped 1.2 percent, a decline expected to be reversed in July.
Food costs were unchanged in June.
Overall inflation is up 2.5 percent over the past 12 months, even with the increases in energy. The core rate of inflation has risen 2 percent over the same period.
The price moderation in June was helped by a 0.7 percent drop in clothing prices, the third decline this year. Analysts said a flood of cheap clothing coming from China after global quotas were removed is helping hold down clothing prices.
The cost of new cars was unchanged in June, but analysts predicted price drops in coming months reflecting the aggressive discounting going on.
One area with price increases was a 2.3 percent jump in the cost of airline tickets.
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On the Net:
Consumer prices: http://www.bls.gov/cpi
Retail sales: http://www.census.gov/retail