Inflation relatively mild

`Core' prices up a less-than-expected 0.2% in July


Consumer price inflation in July was tamer than anticipated, the Labor Department said yesterday in a report that offered another hint that the Federal Reserve's higher interest rate strategy might be succeeding in tamping down inflationary pressures.

The report on the relatively benign consumer price index data came a day after the department cheered Wall Street by reporting a similar slowdown in wholesale prices.

However, some economists cautioned that the inflation genie isn't necessarily back in the bottle just yet.

"Today's report should not be taken as proof of underlying inflationary pressures abating," said Danske Bank economist Peter Possing Andersen.

Andersen continues to expect that the Fed, which over the past two years raised short-term interest rates 4.25 percentage points, to 5.25 percent, before opting to pause earlier this month, is simply "on hold for a few months before resuming its tightening cycle around the new year."

At Moody's consulting group, economist Augustine Faucher offered a slightly more upbeat interpretation, calling the July CPI report "good news on the inflation front." But, he added, it remains "unclear if this represents a trend or is merely a temporary lull."

The CPI's overall, or "headline," reading rose a substantial 0.4 percent in July. But economists tend to pay more attention to the "core" index, which excludes volatile food and energy prices and is thought to offer a better take on underlying inflation trends. The core reading rose 0.2 percent, below the 0.3 percent increase most experts had been expecting. Even so, the effects of higher oil costs are obviously showing up in more expensive retail prices for everything from plastic bags made from petrochemicals to appliances, which are transported to market by trucking companies paying higher fuel costs.

In addition, CPI rates are being pushed upward by a somewhat technical "rent equivalent" measure related to higher housing prices. Over the past 12 months, in fact, core prices have risen 2.7 percent. That's even with the rate for the 12 months that ended in June, but it is also the highest year-over-year rate since 2001, and substantially higher than the average 2.2 percent annual rate displayed during the preceding six months.

"While inflation is not out of control by historical standards, it has clearly been on an upswing," said Brian Wesbury, chief economist at First Trust Advisors.

Wesbury said he thinks that inflation will continue to pose a threat, and that the Fed will respond by raising short-term rates in coming months by an additional three-quarters of a percentage point, to 6 percent.

A separate report yesterday, showing a slowdown in the nation's industrial production last month, offered another suggestion that the economy is ratcheting back in response to the Fed's strategy.

The Fed's statistical branch reported that output from the nation's mines, factories and utilities grew by 0.4 percent in July, below the 0.6 percent that experts had been anticipating.

James P. Miller writes for the Chicago Tribune.

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