July Inflation Is a Real Scorcher

Energy prices fueled a 0.8% CPI jump—double the rate economists had been expecting. But August's slump in crude oil could spell relief

By BusinessWeek, Standard & Poor's, and Action Economics staff

An energy-fueled 0.8% monthly surge in consumer prices—double the rate expected by economists—boosted the year-over-year inflation rate to the highest level since the 1991 Gulf War. But the big August slump in energy prices could counteract the July jump. Meanwhile, another report on first-time unemployment filings points to continued weakness in the U.S. labor market.

The government's consumer price index for July, released Aug. 14, showed a jumbo 0.8% increase in the headline inflation figure, more than the 0.4% expected by the market. Excluding food and energy, prices rose 0.3%, slightly more than the 0.2% consensus. Energy prices surged 4.0%, and food was up 0.9% in the month. Energy prices were up 29.3% from a year ago, and food 6.0%.

Excluding food and energy, the core CPI was up 2.5% from a year ago, continuing its recent acceleration and well above the Fed's 2.0% top target. The total CPI is up 5.6% from a year ago—the largest year-over-year gain since the 1991 Gulf War—well above the 3.4% rise in earnings reported for the month.

Apparel prices jumped 1.2% in July but remain up only 0.8% on the year. Medical care slowed to a 0.1% rise in July.

"The data are higher than expected and should push Treasury rates higher, although with energy and other commodity prices having come down, the markets may discount some of these data as old news," wrote Action Economics analysts in an Aug. 14 Web site posting.

Jobless Claims Still Above Key Figure

According to a Labor Dept. report released Aug. 14, initial claims for unemployment insurance benefits fell 10,000 in the week ending Aug. 9, to 450,000. But that's above the drop to 445,000 that markets had expected. The four-week average jumped 19,500 to 440,500, still above the 400,000 level that is consistent with recession. The number of people receiving benefits surged 114,000 to 3.417 million, pushing the insured unemployment rate up 0.1%, to 2.6%.

The claims data may be distorted by the extension of benefits recently passed by Congress, which has caused some unemployed to reapply, according to an Aug. 14 note from S&P Economics. "Still, the level is holding above 400,000, and it seems to reflect mostly labor market weakness."

U.S. equity indexes slumped following the CPI jump, reversing earlier gains that had been supported by a 17% gain in Wal-Mart's (WMT) second-quarter net income and a pullback in crude oil from highs. Treasury yields moved higher, as did the dollar index.

Fed funds futures, a vehicle for market pros to bet on future interest rate moves, were slightly lower after the worse-than-expected inflation data, though losses were tempered by the still high level of jobless claims. Despite the erosion in the inflation data, the market is still showing little risk of a Fed rate hike any time soon, says Action Economics: Futures prices indicate the market sees only a 32% chance for a 25-basis-point rate hike by yearend.