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August 16, 2000

U.S. July Consumer Prices Rise 0.2%; Core Up 0.2%
By Siobhan Hughes and Liz Enochs, Bloomberg

And Wall Street Still Ignores Inflation ... Weiss comments

WASHINGTON - U.S. consumer prices rose in July as increased costs for food, housing and medical care more than offset a fourth monthly decline for clothing, government figures showed today.

The consumer price index, the most closely watched gauge of U.S. inflation, rose 0.2% last month after rising 0.6% in June, the Labor Department said. The core rate of the CPI, which excludes food and energy costs, also rose 0.2% in July for a fourth straight month.

Through July, the overall CPI rose at a 4% annual rate, compared with a 2.4% increase during the first seven months of 1999. The core rate increased at a 2.6% annual rate through June compared with a 1.9% rate of increase in the first seven months of last year.

``The direction of inflation is still up, albeit slowly,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. ``If the economy has not slowed, core inflation will continue to climb.''

Analysts had predicted a 0.1% gain in the overall index last month. They also called for a 0.2% gain in the core rate.

Outside of the declines in the costs of apparel and gasoline, prices for other consumer goods generally increased. That could keep Federal Reserve policy-makers apprehensive about the inflation threat even though analysts expect they won't raise interest rates at their meeting next week.

At their June meeting, Fed policy-makers held the overnight bank lending rate at a nine-year high of 6.5%, saying the economy was showing tentative signs of slowing and inflation still posed a risk. Central bankers have raised the overnight rate six times since June 1999 to cool growth and keep inflation in check.

Beginning construction of new housing fell in July to the lowest level since November 1997, a separate Commerce Department report showed. Housing starts unexpectedly fell 3.3% to a 1.512 million-unit annual rate last month, the government said.

The Labor Department also said in a separate report that average weekly earnings adjusted for inflation were unchanged in July for a second straight month.

The U.S. Treasury's 10-year note fell 1/4 point, pushing up the yield 3 basis points to 5.83%, after the reports on consumer inflation and housing. Stock rose. The Standard & Poor's 500 stock index rose 3 points, or 0.2%, while the Nasdaq Composite index rose 33 points, or 0.9%, in morning trade.

Electricity Costs Rise

Energy prices, which account for about a 10th of the index, rose 0.1% in July, compared with a 5.6% surge in June. A 2% decrease in the cost of gasoline was offset by increases for fuel oil, electricity and natural gas.

The cost of gas at the pump was as low as $1.514 in July after reaching a record high of $1.711 a gallon in the week ended June 19, according to U.S. Energy Department statistics. The price was down to $1.489 this week.

Food prices, which account for about a fifth of the index, rose 0.5% in July after rising 0.1% the month before. July's gain was led by higher prices for fruits, poultry and dairy products.

Tobacco prices rose 3.1%. R.J. Reynolds Tobacco Holdings Inc., the No. 2 U.S. tobacco company, said it was raising wholesale prices by 6 cents, or about 3%, effective July 31, to help pay legal bills for cases involving smokers hurt by tobacco.

Clothing costs fell 1% in July, the fourth consecutive monthly drop and the biggest drop since a 1.1% fall in January. One reason is that retailers, including AnnTaylor Stores Corp., marked down prices on spring and summer clothing to make way for fall fashions.

Medical Care

In other categories, medical care costs increased 0.3% and prescription drug prices increased 0.4%. Housing costs, which represent about one-third of the index, increased 0.4%.

Medical costs ``are rising at a more accelerated rate than what we have seen over the past few years,'' said Rick MacDonald, an economist at Standard & Poor's MMS in Belmont, California, before the report. ``It seems like those higher growth rates will end up being a little more persistent.''

Transportation costs fell 0.3% in July as travelers benefited from competition. US Airways Group Inc., the sixth-largest carrier, sparked a price war last month by cutting some U.S. and Canadian fares as much as 45%, spurring other major U.S. airlines to also offer discounts.

New car prices rose 0.2% in July after a 0.1% decrease in June.

The CPI is the government's broadest gauge of costs for good and services. About 55% of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets. Goods, ranging from food and clothing to autos and appliances, account for the rest.

Productivity Gains

Inflation has stayed in check because business investment in computers, networks and other productivity enhancements has boosted worker output per hour. That lets companies raise wages without boosting prices.

Fed Chairman Alan Greenspan told Congress last month that ``wage inflation by itself'' does not cause higher prices and that rising wages should in fact be a goal of U.S. monetary policy. The problem is when wage gains outstrip productivity gains, ``because history always tells you that is a recipe for inflation and for economic recession.''

Still, consumers can expect higher prices ahead for many household products.

Procter & Gamble Co. plans to raise prices an average of 6.4% on its Tide, Cheer, and other brands in the U.S. because of rising raw-material costs. Petrochemicals, used in detergents, have risen along with oil costs, while paper costs are also rising.

Weyerhaeuser Co., the No. 3 North American paper and lumber maker, said it will increase some prices by about 8% starting in September, similar to a move that Georgia Pacific Group is said to be making.

The stock market opened higher this morning due to news that the core rate of inflation had risen by only 0.2%. Wall Street believes that this increase is not enough for the Fed to raise interest rates. While the Fed may not raise interest rates next week, this month's CPI report certainly indicates that inflationary pressures are still mounting.

Take a look at the evidence: The cost of food, energy, housing and medical care rose in the past month. Only clothing prices decreased -- the result of end-of-summer sales. However, next month's figures on back-to-school shopping are sure to reveal rising costs in clothing. More importantly, price increases of essential household products such as detergents, soaps, and tissue paper have already been announced by Procter & Gamble, Georgia Pacific, and Weyerhaeuser Co. Consumers will begin to feel the pinch in their wallets very soon.

The big companies won't continue to hold prices steady. Every day, there is a new announcement of a projected slowdown in earnings, and Wall Street punishes the company's stock. It won't be long before companies raise prices in order to protect those juicy profits that Wall Street demands. And let's not forget: Oil prices are rebounding again, threatening to move to new highs. Inflation will worsen, forcing the Fed to raise interest rates yet again.

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