U.S. Consumer Prices Rose More Than Forecast in July

By Shobhana Chandra

Aug. 14 (Bloomberg) -- U.S. consumer prices jumped to a 17- year high in July, reducing the ability of the Federal Reserve to lower interest rates should the economic slowdown deepen.

The consumer price index climbed 0.8 percent, twice as much as anticipated, the Labor Department said today in Washington. The cost of living was up 5.6 percent in the year ended in July, the biggest surge since January 1991. So-called core prices, which exclude food and energy, also rose more than projected.

The report may intensify the debate between those Fed policy makers that forecast inflation will slow and those concerned that price pressures will accelerate. Increases beyond food and fuel, including gains in clothing, airline fares and education, make it less likely that central bankers will be able to keep interest rates unchanged for long.

There is ``a tremendous amount of cost pressure here that is affecting many, many industries,'' William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. Today's report ``raises the general trajectory'' of interest rates, reducing the chance of cuts and bringing forward the likelihood of increases, he said.

Still, commodity costs have retreated since mid-July, indicating the rise in total consumer prices may slow. Crude oil futures dropped as low as $112 a barrel this week after topping $147 last month. Regular gasoline, which reached a record $4.11 a gallon on July 17, has fallen about 8 percent, according to AAA.

Treasuries, Stocks

Treasuries rose, with benchmark 10-year note yields falling to 3.90 percent at 9:39 a.m. in New York, from 3.94 percent late yesterday. The Standard & Poor's 500 Stock Index dropped 0.6 percent to 1,278.64.

Consumer prices were forecast to rise 0.4 percent, according to the median forecast of 78 economists in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 0.7 percent.

Costs excluding food and energy increased 0.3 percent for a second month, exceeding the 0.2 percent median forecast of economists surveyed.

The core rate increased 2.5 percent from July 2007, the most since January, after a 2.4 percent year-over-year increase the prior month.

Separately, Labor reported that more Americans than anticipated filed first-time claims for jobless benefits last week.

Energy expenses jumped 4 percent, after a 6.6 percent gain in the prior month, today's report said. Gasoline prices increased 4.1 percent.

Cost Pressures

Procter & Gamble Co. was among businesses that responded to the surge in oil earlier this year. The world's largest consumer- products company charged more for Cascade dishwashing detergent, Iams pet food and Gillette razors to offset some of the jump in packaging costs. McDonald's Corp., the world's largest restaurant company, raised prices as ingredient expenses surged.

``Beef and cheese are up, but we've been able to mitigate that cost,'' Chief Executive Officer James Skinner said in an interview in Beijing last week.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Food prices, which account for about a fifth of the CPI, gained 0.9 percent after a 0.8 percent increase in June.

Clothing Costs

The increases went beyond food and fuel. Clothing expenses jumped 1.2 percent, the most since 1998. The cost of an airline ticket rose 1.3 percent and education expenses climbed 0.5 percent for a second month.

Rents which, make up almost 40 percent of the core CPI, cooled. A category designed to track rental prices rose 0.1 percent, compared with a 0.3 percent gain in June.

Policy makers at the Fed's Aug. 5 meeting signaled they're unlikely to change rates as they wait for slowing growth to cool inflation.

``Although downside risks to growth remain, the upside risks to inflation are also of significant concern,'' the Fed statement said. Still, ``the Committee expects inflation to moderate later this year and next year.''

Today's figures also showed wages decreased 0.8 percent after adjusting for inflation following a 0.9 percent drop in June. They were down 3.1 percent over the last 12 months, the biggest year-over-year decline since 1990. The drop in buying power is one reason economists forecast consumer spending will slow.

Car Sales

Higher gasoline bills and tighter credit reduced automobile purchases in July, causing retail sales to drop for the first time in five months, government figures showed yesterday.

Economists John Ryding and Conrad DeQuadros at RDQ Economics LLC in New York are among those not convinced inflation will continue to ebb. The recent decline is just ``temporary relief,'' they said.

``It would be a mistake to view this as a rolling over of the inflation problem and an endorsement of the Fed's policy to keep rates on hold,'' they wrote Aug. 11. By keeping rates low, policy makers will contribute to a pickup in prices later this year and next, they said.

A jump in the cost of imported goods may also give American companies leeway to charge more, economists said. Prices of products made overseas soared 22 percent in the year ended in July, the most since at least 1982, the Labor Department reported yesterday.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net