WASHINGTON: U.S. consumer prices rose more than expected in July, with a measure of underlying inflation increasing by the most in 29-1/2 years amid broad gains in the costs of goods and services.
The report from the Labor Department on Wednesday, however, probably does not mark the start of worrisome inflation, and the Federal Reserve is likely to continue pumping money into the economy to aid the recovery from the COVID-19 recession.
The jump in prices is likely an unwinding of sharp declines experienced when nonessential businesses were shuttered in mid-March to slow the spread of the coronavirus. The higher prices further dispel fears of deflation, a decline in the general price level that is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices.
"This should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. "But this is not a sign that the U.S. is instead about to experience a bout of much high inflation because of supply restrictions."
The consumer price index rose 0.6per cent last month, with gasoline accounting for a quarter of the gain. The CPI increased by the same margin in June. In the 12 months through July, the CPI accelerated 1.0per cent after climbing 0.6per cent in June.
Excluding the volatile food and energy components, the CPI jumped 0.6per cent last month as the cost of motor vehicle insurance surged a record 9.3per cent. That was the largest gain in the so-called core CPI since January 1991 and followed a 0.2per cent rise in June. In the 12 months through July, the core CPI advanced 1.6per cent after increasing 1.2per cent in June.
Economists polled by Reuters had forecast the CPI would rise 0.3per cent in July and the core CPI would gain 0.2per cent.
The report followed on the heels of news on Tuesday that producer prices accelerated in July.
With at last 31.3 million people on unemployment benefits, inflation is hardly a threat in the services-oriented economy.
"The biggest input to service sector prices is labor, and when you have more that 30 million people claiming unemployment benefits there is likely to be a glut for quite a while," said James Knightley, chief international economist at ING in New York. "This will keep wage pressure subdued, thus limiting the upside for service sector inflation."
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2per cent inflation target. The core PCE price index rose 0.9per cent on a year-on-year basis in June. Economists expect July data, which will be released later this month, will show the core PCE price index rose about 1.4per cent.
The U.S. central bank has adopted an extraordinarily easy monetary policy, slashing interest rates to near zero as well as making large-scale asset purchases and funneling loans to firms among other measures. But the budding recovery from the pandemic is showing signs of stress as new coronavirus infections spiral across the United States, forcing authorities in some of the hot spots to either shut down businesses again or pause reopenings.
Job growth slowed significantly in July. The economy, which entered recession in February, suffered its biggest blow since the Great Depression in the second quarter, with gross domestic product dropping at its steepest pace in at least 73 years.
Stocks on Wall Street were trading higher, with the S&P 500 index edging toward a record high. The dollar fell against a basket of currencies. U.S. Treasury prices were trading mostly lower.
FOOD PRICE RELIEF
In July, gasoline prices advanced 5.6per cent after soaring 12.3per cent in June. Food prices fell 0.4per cent, the first decrease since April 2019, after rising 0.6per cent in June. The cost of food consumed at home dropped 1.1per cent, with beef prices tumbling 8.2per cent after surging in recent months. But the cost of food consumed away from home rose 0.5per cent, with full-service meals increasing 0.4per cent.
Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.2per cent. That followed June's 0.1per cent gain, the smallest rise since July 2013. Many tenants have entered into forbearance agreements with landlords.
Consumers also paid more for healthcare in July, with prices rising 0.4per cent. The cost of doctor visits increased 0.7per cent and prices for hospital services rose 0.2per cent. The cost of prescription medication, however, fell 0.2per cent.
Prices for wireless telephone services rose 3.6per cent. Prices of used cars and trucks increased 2.3per cent after three straight monthly declines. The cost of airline fares jumped 5.4per cent, the biggest rise since July 1999. Prices for hotel and motel accommodation increased 1.3per cent.
New motor vehicles prices gained 0.8per cent and those of apparel advanced 1.1per cent. There were also increases in the prices of household furnishings, recreation, personal care products and services.
"The weakness in rents is arguably more indicative for longer-term inflation trends than the rebounds in travel and core goods, and the weakness is more likely to persist" said Oscar Munoz, macro strategist at TD Securities in New York.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)