Core consumer prices increase

Andrew Ward, Bloomberg News

U.S. consumer prices excluding food and energy rose at the slowest pace of the year in June, suggesting the Federal Reserve can keep raising its benchmark interest rate gradually.

The core consumer price index increased 0.1 percent after a 0.2 percent rise in May, the Labor Department said in Washington. Including food and energy, the 0.3 percent gain was half that of the previous month, providing a boost to stock and bond prices.

The data "make the Fed comfortable that inflation is contained and that what boosted the CPI earlier in the year was temporary," said Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York.

Consumer sentiment in the U.S. economy rose in July to the highest level in six months, the University of Michigan said in a preliminary monthly report. The gain in July is a "delayed recognition of more vigorous job creation," said Steven Wood, chief economist at Insight Economics in Danville.

The addition of 1.5 million jobs over the past 10 months has boosted incomes, while retail gasoline prices have fallen six of the last seven weeks.

Apple Computer Inc. said Wednesday that a surge in sales of iPod digital music players drove revenue in the company's fiscal third quarter to an eight-year high.

"The economy is really running very strongly," said William Zollars, chief executive at Roadway Yellow Corp., the biggest U.S. trucking company, said in an interview from Kansas City.

Consumer prices were expected to rise 0.2 percent last month on both the overall and core basis, based on the median forecast of 70 economists in a Bloomberg News survey.

The Treasury's 4 3/4 percent note maturing in May 2014 rose 13/16 point after the report. The yield fell 10 basis points to 4.38 percent at 1:36 p.m. in New York. The Dow Jones Industrial Average rose 17.33 points, or 0.2 percent, to 10180.49.

The dollar fell to a four-month low against the euro. The dollar traded at $1.2448 per euro in New York, down from $1.2356 Thursday.

A government report Friday said foreigners bought U.S. Treasuries, stocks and other securities at the slowest pace since October, purchasing a net $56.4 billion in assets.

The inflation report showed consumer prices were 3.3 percent higher than in the previous June, the biggest 12-month increase since May 2001. The core CPI was up 1.9 percent from a year ago.

Food prices, which account for about a fifth of the inflation index, rose 0.2 percent after increasing 0.9 percent in May. Dairy prices, which had soared in May, rose 1.7 percent.

Fed policy makers say inflation reports will help determine whether they raise borrowing costs at the "measured" pace they described June 30 after raising rates for first time in four years, by a quarter-point to 1.25 percent.

"I was surprised by how quickly inflation accelerated earlier this year," said Fed Governor Susan Bies after a speech in Chicago. "It isn't clear that those kinds of trends will continue to go forward."

Fed Chairman Alan Greenspan may offer more insight into the U.S. central bank's thinking on inflation when he gives the Fed's twice- yearly economic forecast and outlook for monetary policy to the Senate Banking Committee on Tuesday. He speaks again the next day to the House Financial Services Committee.

"For the FOMC, the report represents some relief, bolstering its contention that the early year surge in inflation was in part temporary," said Peter Kretzmer, senior economist at Bank of America Corp. in New York. "The report gives no reason for the committee to increase its gradual pace of tightening, and we expect a 25 basis point hike in August."

The economy is ranked as the No. 1 issue in this year's campaign as President George W. Bush fends off criticism from challenger John Kerry, a four-term Massachusetts senator, according to a poll taken July 8-11 by the Washington Post.

The poll of 850 adults, which has a margin of error of plus or minus 3 percentage points, showed the men are in a statistical tie. The percentage who approve of Bush's handing of the economy fell to 45 percent from 51 percent at the beginning of the year.

The University of Michigan said today its preliminary index of consumer sentiment for the month rose to 96 this month from 95.6 in June. It was the first time since October-November that the measure has increased in consecutive months.

"The favorable attitudes do support our view that the underlying fundamentals for consumers remain good, and we are comfortable that consumer spending will revive this summer after a rough June," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Conn.

The expectations index, which measures optimism about the next one to five months, rose to 90.4 from 88.5 in June, the university survey said. The current-conditions index, based on perceptions of consumer finances and whether it's a good time to make big purchases, fell to 104.6 in July from 106.7 last month.

Energy prices, which account for about a 14th of the inflation index, rose 2.6 percent in June, less than in May, and were up 17 percent from a year earlier. Gasoline prices rose 3.1 percent in June and were up by a third in a year.

Higher energy prices mean shoppers have less to spend on other goods and services. The average weekly earnings of U.S. workers decreased 0.8 percent after falling 0.1 percent, today's inflation report said.

"Consumer spending is slowing because of these cost increases," Banc of America's Kretzmer said in an interview yesterday. "If it stays weak, everything else will slow down."

Oil prices today rose to a six-week high on concern Saudi Arabia and other producers have tapped most of their capacity and won't be able to meet demand from North America, Asia and Europe should terrorists disrupt supplies.

Crude oil for August delivery rose 71 cents, or 1.7 percent, to $41.48 a barrel on the New York Mercantile Exchange. The contract reached $41.80 during the first 11 minutes of trading, the highest since a record $42.45 on June 2.

"This is going to cost us a few hundred million more than we were hoping," said Jeff Glasgow, senior manager of petroleum products at Union Pacific Corp., the largest U.S. railroad by sales and the second-biggest user of diesel after the U.S. Navy.

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