Inflation remains tame: U.S. consumer prices unchanged in July

More good news amid a week of positives for U.S. investors: inflation remains tame. Consumer prices were unchanged in July, the U.S. Labor Department announced Friday, as a lack of demand led to little pricing power in the U.S. economy.

What's more, the U.S. economy over the past year shows little sign of inflation: consumer prices have actually declined 2.1 percent in the past 12 months -- the biggest yearly decline in prices since 1950.
Economists surveyed by Bloomberg News had expected consumer prices to increase 0.1 percent in July. Consumer prices increased 0.7 percent in June and 0.1 percent in May.

Further, the core rate, which excludes the often-volatile food and energy component, and is more indicative of inflation in the economy increased just 0.1 percent in July, below the Bloomberg News 0.2 percent core consensus estimate. Core prices rose 0.2 percent in June.

Moreover, the 12-month core rate -- one metric the U.S. Federal Reserve watches closely for signs of rising, long-term inflation -- has risen just 1.5 percent, or well within the Fed's 'comfort zone' for inflation.

In July, energy prices fell 0.4 percent, food prices declined 0.3 percent, new car prices rose 0.5 percent, housing costs declined 0.2 percent, medical care rose 0.2 percent, apparel climbed 0.6 percent, and recreation costs were flat.

Inflation hawks remain nested

Most economists do not expect inflation to rise in the months ahead. They say the recession that has idled factory production and resulted in more than 6.7 million layoffs has led to excess capacity in the commercial sector and slack in the labor force that will limit price/wage increases. Also working against inflation is the reluctance by foreign manufacturers who export goods to the United States to raise prices amid intense competition. Many refuse to raise prices despite cost increases for fear of being priced-out of the lucrative, large U.S. market.

Further, the Brookings Institution, a center-left Washington, D.C. think tank, cautioned against actions to withdraw fiscal stimulus or to reduce the budget deficit too soon. The economy appears to be recovering, Brookings said, but unemployment is still rising and will continue to do so for a considerable period. He added that the economy will have to grow at a 3 percent annualized rate to lower unemployment. The U.S. economy is not growing anywhere near that rate yet.

Economic Analysis: Once gain, little food for for the inflation hawks. Inflation remains tame, as indicated by both the core rate and the 12-month CPI. Further, the 12-month CPI decline will be monitored closely by the Fed: any further deterioration in prices in the next two quarters would suggest that deflation is taking hold.

Inflation is non-existent, at least at this juncture of the Fed's and Congress's effort to re-liquefy credit markets and jump start the U.S. economy. The U.S.'s pronounced recession has created price pressure -- not pricing power -- for businesses. Pricing power is so weak for firms that the U.S. Federal Reserve believes the nation is more likely to experience a bout of deflation -- not inflation -- at least through mid-2010, and perhaps for a longer period.

Further, the July CPI data will only reinforce the argument forwarded by the Fed's inflation doves that the nation can maintain an accommodationist monetary policy through Q4 2009/Q1 2010 to stimulate the U.S. economy and and support what appears to be the approaching economic recovery.
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