U.S. Consumer Prices Climb, Easing Deflation Risk

By Timothy R. Homan -

The cost of clothing, used cars and tobacco climbed, diminishing the risk of a protracted drop in prices. Photographer: Andrew Harrer/Bloomberg

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Aug. 13 (Bloomberg) -- Mohammed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., discusses Federal Reserve monetary policy. El-Erian, speaking with Tom Keene and Ken Prewitt on Bloomberg Radio's "Bloomberg Surveillance," also discusses deflation and the outlook for the U.S. economy. (This report is an excerpt of the full interview. Source: Bloomberg)

Partially completed townhouses stand at the Lexington Park development in Des Plaines, Illinois. Photographer: Tim Boyle/Bloomberg

The cost of living in the U.S. climbed in July for the first time in four months, pointing to a stabilization that may ease concern a slowdown in growth will spur deflation.

The consumer-price index increased 0.3 percent, the most in a year and exceeding the 0.2 percent gain projected by the median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. A gauge excluding volatile food and fuel costs, the so-called core rate, increased 0.1 percent, as projected.

The report showed rents, the biggest component in CPI, increased for a second month, and the cost of clothing, used cars and tobacco climbed, diminishing the risk of a protracted drop in prices that would hurt the economy. Economists say the lack of inflation gives Federal Reserve policy makers scope to leave the benchmark interest rate near zero into 2011 to help invigorate the economy.

“There’s been some firming in core inflation in recent months,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York, who accurately forecast the 0.3 percent gain in the overall prices. “This takes some pressure off the Fed in terms of deflation.”

A report from the Commerce Department showed sales at U.S. retailers rose less than forecast in July, indicating the lack of jobs is prompting Americans to rein in spending. Purchases increased 0.4 percent, led by autos and gasoline. Excluding auto dealers and service stations, demand dropped 0.1 percent.

Market Reaction

Stock-index futures held earlier losses after the reports. The contract on the Standard & Poor’s 500 Index dropped 0.1 percent to 1,078.2 at 8:47 a.m. in New York. Treasury securities rose.

The forecast gain in consumer prices was based on the median estimate of 77 economists in a Bloomberg survey. Projections ranged from no change to a gain of 0.4 percent.

In the 12 months ended in July, prices rose 1.2 percent following a 1.1 percent year-over-year gain the prior month. Economists had forecast a 1.2 percent rise in the 12 months to July, according to the survey median.

The core rate rose 0.9 percent from July 2009, matching the smallest year-over-year gain since 1966.

Compared with a month earlier, energy costs increased 2.6 percent, and food costs fell 0.1 percent.

Raising Prices

Some companies are passing costs on to consumers. J. M. Smucker Co. said it will raise the price for most of its Folgers, Dunkin Donuts and Millstone coffee brands by an average 9 percent in the U.S. Smucker said Aug. 3 the increase was driven by higher green-coffee prices.

Owners-equivalent rent, one of the categories designed to track rental prices, rose 0.1 percent for a second month, the first back-to-back gain in a year.

Apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership. The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent in June from 8.2 percent in December.

Fed Action

Fed policy makers this week left the overnight interbank lending rate target in a range of zero to 0.25 percent, where it’s been since December 2008. High unemployment, low inflation and stable price expectations “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the U.S. central bank said, repeating language from every policy meeting since March 2009.

The CPI is the broadest of three monthly price gauges from Labor, because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

The cost of medical care decreased 0.1 percent in June, the biggest drop since 1975.

A Labor Department report yesterday showed prices of goods imported into the U.S. rose less than forecast in July. The 0.2 percent increase marked the first gain in three months and followed a 1.3 percent drop in June.

The producer-price index for July is scheduled for release on Aug. 17. Economists surveyed by Bloomberg forecast a 0.2 percent gain, which would be the first increase since March.