Consumer prices hold in July

Core inflation keeps below Fed’s annual 2% target

Shoppers look at sale items at a J.C. Penney store in New York in this file photo.
Shoppers look at sale items at a J.C. Penney store in New York in this file photo.

WASHINGTON -- U.S. consumer prices were unchanged in July as a big drop in gasoline and other energy prices kept inflation under control.

The Labor Department said Tuesday the flat reading for overall inflation followed a 0.2 percent gain in June. Energy prices fell by the largest amount in five months. Core inflation, which excludes volatile energy and food, edged up 0.1 percent in July, the smallest increase in four months.

"Inflation is very likely to remain tame at best," said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who had forecast the Labor Department's consumer price index would be little changed. "Other than housing and medical care, vast sectors of the economy are still seeing negative price pressures."

The Federal Reserve has an inflation target of 2 percent annual increases. While core inflation has risen 2.2 percent over the past 12 months, overall inflation is still well below the Fed's target, rising just 0.8 percent in the past 12 months. The Fed has left interest rates unchanged after a single rate increase last December.

At its last meeting, the Fed noted that risks to the economic outlook had diminished, opening the possibility of a rate increase later this year. Federal Reserve Chairman Janet Yellen is set to deliver a policy speech at a conference in Jackson Hole, Wyo., next week and economists are hoping she will provide clues about the Fed's intentions.

Some analysts believe it could occur at the Fed's next meeting in September, although many believe the central bank will wait until December before raising rates again, given modest economic growth and low inflation.

Sal Guatieri, senior economist at BMO Capital Markets, said the new report showing a slowdown in inflation pressures could make Fed officials "a little more uncertain" about how long it will take to reach the Fed's 2 percent inflation target.

Inflation has been low at both the consumer and producer price levels. The government reported last week that producer prices fell by 0.4 percent in July, the biggest drop since last September.

In the report on consumer prices, energy costs dropped 1.6 percent, the first decline since a 6 percent slide in February. Gasoline costs were down 4.7 percent last month.

Outside of food and energy, new car prices posted a small 0.2 percent rise while housing costs and medical care also increased. Offsetting those gains were price declines for airline fares, used cars and trucks and recreation.

Apartment construction in the Northeast fueled a jump in home building in July as the pace of housing starts nationwide reached the strongest pace in six months.

The rate of overall construction rose 2.1 percent to a seasonally adjusted annual rate of 1.21 million from 1.19 million in June, the Commerce Department said Tuesday. That was the highest level since February. Most of the gain came from an 8.3 percent acceleration in the construction of multifamily buildings. Construction of single-family houses edged up just 0.3 percent.

"Continued recovery in housing will be supported by historically low mortgage rates, coupled with a firming labor market that has begun to spur on wage gains for workers," said Neil Shankar, an economist at TD Bank.

Construction climbed 15.3 percent in the Northeast. The Midwest and South reported smaller gains, while starts slipped in the West.

U.S. factories cranked out more autos, machinery and chemicals in July, lifting production by the most in a year.

The Federal Reserve said Tuesday that factory output grew 0.5 percent in July, after a 0.3 percent gain in June.

The figures suggest that U.S. manufacturing may be turning a corner after struggling to overcome the impact of a stronger dollar, slower overseas growth and falling oil prices. Still, factory output is just 0.2 percent higher than it was a year ago. And even as output ticks up, manufacturers aren't adding many jobs.

Overall industrial production, which includes utilities and mining, expanded 0.7 percent. That is the biggest increase since November 2014.

Utilities output jumped 2.1 percent as hotter-than-usual weather boosted air conditioning use. Mining activity rose 0.7 percent, its third straight gain.

"The worst is behind us," said Stephen Stanley, chief economist at Amherst Pierpont Securities. "The outlook is significantly improved from the flat-to-down prevailing trend seen up until recently."

Information for this article was contributed by Martin Crutsinger, Josh Boak and Christopher S. Rugaber of The Associated Press and Shobhana Chandra of Bloomberg News.

Business on 08/17/2016

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