- The Washington Times - Wednesday, August 16, 2006

ASSOCIATED PRESS

A new surge in energy prices pushed inflation higher in July, but other prices were more restrained, raising hopes that interest rates won’t be rising further.

The Consumer Price Index jumped 0.4 percent last month, double the June increase, the Labor Department reported yesterday. But outside of energy and food, prices rose by just 0.2 percent, the smallest gain in five months.

That represented a second dose of good inflation news this week. A report Tuesday said that wholesale prices were up just 0.1 percent in July and, excluding food and energy, actually fell by 0.3 percent.

Two other reports yesterday added credence to the view that a slowing economy could help to hold inflation in check.

The Federal Reserve reported that industrial production rose by 0.4 percent in July, just half the August gain, as manufacturing output slowed dramatically, reflecting the continued woes of U.S. automakers.

And the Commerce Department said new-home construction dropped by 2.5 percent in July. It was the fifth decline in the past six months and pushed construction to a seasonally adjusted annual rate of 1.782 million units, the slowest pace since November 2004.

Building permits, considered a good barometer of future activity, dropped by a sizable 6.5 percent, a further sign that the five-year housing boom is now over.

Wall Street saw the combination of lower core inflation and a slowing economy as a sign that the Federal Reserve will not raise rates for an 18th time when the Fed meets again on Sept. 20.

But private economists said investors may be overreacting. Some predicted the Fed would raise rates at least once more this year in response to core inflation that has risen by 2.7 percent over the past 12 months, higher than the Fed’s 1 percent to 2 percent comfort zone.

“The economy, while cooling off, is not cooling off quickly enough to lower inflation pressures and satisfy the Fed,” said David Wyss, chief economist at Standard & Poor’s in New York, who predicted one more Fed rate increase.

The Fed last week left a key interest rate unchanged, breaking a two-year string of uninterrupted rate increases and raising hopes among investors that the central bank is about to end its credit tightening.

But key to that decision will be the performance of core inflation, which excludes food and energy. The Fed wants to determine whether the sizable increases in energy prices over the past two years are beginning to become a problem in other areas.

For July, core inflation rose by just 0.2 percent, after four consecutive increases of 0.3 percent.

This slowdown reflected in large part a 1.2 percent decline in clothing prices, the biggest one-month drop in 18 years, reflecting heavy discounting by retailers to move unsold summer stock.

But energy prices continued rising, jumping by 2.9 percent in July, led by a 5.3 percent increase in gasoline prices.

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