Bloomberg News

Consumer Prices in U.S. Rise at Slowest Pace in Five Months

August 19, 2014

Consumer Prices in U.S. Increase at Slowest Pace in Five Months

Food shopping at Whole Foods in Arlington, Mass. Photographer: Wendy Maeda/The Boston Globe via Getty Images

The cost of living in the U.S. climbed in July at the slowest pace in five months, indicating price pressures remain limited even as the economy picks up.

The consumer price index increased 0.1 percent, matching the median forecast of 80 economists surveyed by Bloomberg, after rising 0.3 percent the prior month, a Labor Department report showed today in Washington. Stripping out volatile food and fuel, the so-called core measure also climbed 0.1 percent, less than projected.

Inflation continues to run below the Federal Reserve’s target as sluggish global demand limits companies’ ability to charge customers more. Restrained increases give the central bank’s policy makers room to keep interest rates low well after the projected end of their bond-buying program in October.

“Some of the inflation concerns that you were hearing back in June will probably ease off a little bit,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and the second-best forecaster of consumer prices over the last two years, according to Bloomberg data. “It takes some pressure off the Fed to speed up rate normalization. There had been a lot of rhetoric about the Fed being behind the curve on inflation, and this probably takes some wind out of that.”

Another report today showed housing starts surged in July to the highest level in eight months, underscoring the recent pickup in builder optimism and showing more traction in the residential real estate market. Beginning home construction climbed 15.7 percent to a 1.09 million annualized rate following June’s 945,000 pace, which was stronger than previously estimated, the Commerce Department reported today in Washington.

Shares Rise

Stock-index futures rose after the reports, extending earlier gains. The contract on the Standard & Poor’s 500 Index maturing in September climbed 0.3 percent to 1,972.5 at 8:45 a.m. in New York.

Economists’ estimates in the Bloomberg survey ranged from unchanged to a 0.2 percent advance.

The increase in the core gauge matched the June’s advance. Economists had forecast a 0.2 percent increase, according to the survey median.

Overall consumer prices rose 2 percent in the 12 months ended July, following a 2.1 percent year-over-year advance the prior month. The core measure increased 1.9 percent from July 2013, the same as in the prior 12-month period.

Fed’s Goal

The Fed’s 2-percent inflation goal is based on the Commerce Department’s price gauge that is tied to consumer spending. That measure climbed 1.6 percent in the 12 months through June.

Energy costs decreased 0.3 percent in July from a month earlier. Declines in fuel prices have been giving households some relief in recent weeks. The average cost of a gallon of regular gasoline was $3.45 as of Aug. 17, down from this year’s peak of $3.70 in April, according to AAA, the biggest U.S. auto club.

Today’s report showed food costs advanced 0.4 percent in July, reflecting broad-based increases.

Companies such as Smithfield Foods Inc. are seeing a pickup in global demand that is causing prices to climb.

Sales at the pork processor rose 14 percent to $3.8 billion in the second quarter, thanks to tight supplies and strong domestic and international demand for hogs, the company said in an Aug. 11 statement. Smithfield Foods was acquired last year by Shuanghui International Holdings Ltd., which is now named WH Group Ltd. and is the world’s biggest pork supplier.

Food Prices

“Although Russia has banned U.S. pork imports, international demand from other countries remains strong,” Larry Pope, Smithfield’s chief executive officer, said in the statement. “This, combined with lower domestic protein production, should support high hog and pork prices for the duration of 2014 and beyond.”

Even the muted increase in prices is damping wages, which remain tepid. Hourly earnings were unchanged on average last month after adjusting for inflation, another Labor Department report showed today. They were also little changed over the past 12 months.

The core rate reflected increases in rents, new cars and medical care, that were almost completely offset by lower costs for airline fares, used cars, tobacco, recreation and household furnishings. The price of plane tickets dropped by the most since December 1995.

Broadest Measure

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

The Labor Department’s gauge of wholesale prices, which includes 75 percent of all U.S. goods and services, rose 0.1 percent in July and followed a 0.4 percent gain the prior month, data showed last week. A separate report indicated the cost of imported goods fell 0.2 percent last month.

Fed officials led by Chair Janet Yellen have acknowledged that the possibility of “inflation running persistently below 2 percent has diminished somewhat,” according to a statement last month from the Federal Open Market Committee.

Even with inflation inching upward and employment rebounding, Yellen has cautioned it may still be too soon to start scaling back accommodation. Testifying before Congress on July 15, Yellen said the recovery is incomplete and slow wage growth signals “significant slack” in labor markets.

The Fed is on pace to wind down its third round of asset purchases in October after two years of buying Treasury and mortgage securities. Officials in July tapered monthly bond buying to $25 billion in a sixth consecutive $10-billion cut.

To contact the reporter on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net


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