Consumer price spiral eases Some now think Fed may not raise rates


WASHINGTON -- U.S. consumer prices rose in June at the slowest pace in seven months as energy prices posted the largest monthly decline in five years, the Labor Department said yesterday.

The smaller-than-expected 0.1 percent increase in the consumer price index, down from a 0.3 percent increase in May, suggests that Federal Reserve policy-makers, who left interest rates unchanged at a policy meeting two weeks ago, might do the same when they next meet Aug. 20, some observers said.

"We have an economy that's well-balanced and performing at a very satisfactory pace," said Lynn Reaser, chief economist at Barnett Banks in Jacksonville, Fla.

In most cases, the Fed prefers to move on bad inflation news rather than good economic reports. One of those good economic reports came from the Fed yesterday when it said U.S. industrial production increased for the third month in a row in June on across-the-board gains in almost every manufacturing segment.

Output at factories, mines and utilities increased by a larger-than-expected 0.5 percent last month after rising a revised 0.5 percent in May, the Fed said. Its report also showed that the plant-use rate, a measure of the amount of industrial capacity in use, rose to 83.2 percent in June from 83.1 percent in May.

On the negative side, a possible sign of the economy overheating came with a Labor Department report that Americans' weekly earnings, adjusted for inflation, rose at their fastest monthly pace in 14 years in June, led by a surge in average weekly hours worked and average hourly earnings.

Real average weekly earnings increased 2.2 percent last month, the biggest jump since February 1982, after falling 0.5 percent in May. Average hourly earnings, a gauge used by some economists to monitor inflation, rose 0.8 percent during June. Average weekly hours worked rose 1.5 percent from a month earlier.

The Labor Department report said consumer prices rose at a 3.5 percent annual rate in the first half of calendar 1996, up from a 3.2 percent pace in the first six months of 1995 and 2.5 percent for all of last year. Consumer prices excluding food and energy increased at a 2.8 percent pace in the first six months of 1996.

The government also said the CPI's core rate, which excludes often-volatile food and energy costs, rose 0.2 percent in June.

The 2.2 percent drop in energy costs in June, their biggest monthly decrease since March 1991, more than offset a big jump in food prices during the month. Retail food costs rose 1.0 percent, their biggest monthly increase in three years.

The cost of services, such as airline fares and health care costs, which makes up about 55 percent of the CPI, rose 0.2 percent in June.

Household appliance production increased 6.3 percent last month; construction supply production advanced 0.9 percent; and mining output rose 1.5 percent. And a 2.0 percent rise in motor vehicle and parts was partly due to the industry's long-lasting recovery after a strike at General Motors Corp. stifled production in March, the Fed said.

Pub Date: 7/17/96

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