Consumer price inflation slows

WASHINGTON – U.S. core consumer prices rose at a slightly slower rate in July and the pace of construction starts on new homes was the slowest in more than three years, the government said.

The two reports added to evidence of a slowing economy that may help keep inflation in check and permit the Federal Reserve to keep interest rates steady. Stock futures and bond prices rallied immediately after the data was issued and the dollar weakened against other currencies. The Labor Department said its core consumer price index, an inflation gauge that strips out volatile food and energy costs, rose 0.2 percent in July – breaking a four-month string of 0.3 percent increases. Overall, consumer prices were up 0.4 percent in July after a 0.2 percent gain in June.

Separately, the Commerce Department said housing starts fell 2.5 percent in July to an annual pace of 1.795 million units, from a downwardly revised 1.841 million unit pace in June. It was the slowest rate of starts since May 2003.

“This will certainly add fuel to the idea that the Fed will stop raising rates, because the housing industry is rapidly getting more weak,” said Michael Metz, chief investment strategist for Oppenheimer & Co. in New York.

Fed policy makers raised interest rates steadily from mid-2004 until their last meeting earlier this month, when they kept them steady, saying they wanted to assess whether the economy was slowing enough to keep inflation in check. The next Fed policy session is set for September 20.

The overall increase in consumer prices during July matched Wall Street economists’ predictions but the rate of the core rise came in below estimates for a 0.3 percent rise.

Analysts noted that in the future rental costs may rise as housing construction slows, but for now the moderation in July core price rises was welcome. “The numbers were in line with expectations, and you’re getting a lot of rental price gains and that’s going to continue as long as the housing market is soft and will on average tend to lift the inflation rate, but in the month of July we got a pleasant surprise,” said Joseph Lavorgna, senior economist at Deutsche Bank Securities in New York. Energy prices climbed a seasonally adjusted 2.9 percent in July after falling 0.9 percent in June. But costs for apparel fell 1.2 percent after being flat in June. Goods and services – a category that covers goods like personal care items and tobacco – fell 0.2 percent last month after rising 0.6 percent in June.

“It does provide some relief but it’s too early to declare victory over inflation,” said economist Richard DeKaser of National City Corp. in Cleveland. “It takes more than one month of a 0.2 percent increase (in core prices) after several months of 0.3 percent increases.”

So far during the first seven months of 2006, core consumer prices have risen at a 3.1 percent annual rate, compared with 2.2 percent in the comparable period of 2005. The department said about 80 percent of the acceleration in core prices so far this year was accounted for by rising costs of shelter, such as rents.