Consumer Prices Rise Modestly; Housing Costs Up Solidly

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Consumer Prices
Danny Johnston/AP
By Lucia Mutikani

WASHINGTON -- Consumer prices rose slightly in July, but a solid increase in the cost of shelter suggested inflation was probably stabilizing enough to support expectations the Federal Reserve will raise interest rates this year.

The Labor Department said Wednesday its Consumer Price Index edged up 0.1 percent last month as gasoline and food prices increased marginally. July's increase in the CPI was a slowdown from the 0.3 percent gain in June. It was the sixth straight month of increase in the CPI.

%VIRTUAL-pullquote-Modest inflation shouldn't hold the Fed back from raising rates this year. Prices are bottoming.%"Modest inflation shouldn't hold the Fed back from raising rates this year. Prices are bottoming," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Shelter costs, the government's way to track the cost of owning or renting a home and which account for a third of the CPI, shot up 0.4 percent, the largest increase since February 2007. That was on top of a 0.3 percent again in June.

In the 12 months through July, the CPI climbed 0.2 percent. It was the second month the annual CPI increased after plunging crude oil prices pushed it into negative terrain in January.

Signs of an ebb in the disinflationary trend, combined with a tightening labor market and strengthening housing sector could give the Fed confidence that inflation will eventually rise toward its 2 percent target.

"Fed officials made clear that they do not need to see higher inflation before hiking. They just need to have reasonable confidence it will return to mandate," said Michelle Girard, chief economist at RBS in Stamford, Connecticut.

Most economists expect the U.S. central to raise its short-term interest rate next month for the first time in almost a decade.

Gradual Tightening

But the pace of monetary tightening is likely to be gradual given the dampening effect on inflation of a strong dollar, renewed weakness in oil and other commodity prices, and China's devaluation of the yuan, which should push down import prices.

Economists polled by Reuters had forecast the CPI rising 0.2 percent from June and gaining 0.2 percent from a year ago.

U.S. Treasury debt prices briefly rose after the data before slipping. The dollar was trading slightly higher against a basket of currencies.

The so-called core CPI, which strips out food and energy costs, ticked up 0.1 percent last month after rising 0.2 percent in June. Shelter was the main contributor to last month's rise in the core CPI.

In the 12 months through July, the core CPI increased 1.8 percent. It was the fourth time in five months that the 12-month change was 1.8 percent.

Last month, gasoline prices rose 0.9 percent after rising 3.4 percent in June. Food prices gained 0.2 percent, slowing from a 0.3 percent increase in June as the impact of the bird flu on egg prices eases.

Egg prices rose only 3.3 percent after a June's 18.3 percent surge, which had been the biggest gain since August 1973.

Declining homeownership and a rental vacancy rate near a 22-year low is driving rents higher. Rents increased 0.3 percent in July. There were also increases in the cost of medical care. Apparel prices increased after declining for three straight months.

However, airline fares dropped 5.6 percent, the largest decline since December 1995. Prices for used cars and trucks and household furnishings and new motor vehicles also fell last month.

9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Prices Rise Modestly; Housing Costs Up Solidly
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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