Core CPI Inches Up

Washington, DC August 16, 2006–Core consumer inflation eased back in July, rising just 0.2% after four months of 0.3% gains, the Labor Department said Wednesday.

The relatively tame 0.2% increase in core consumer price index could help keep the Federal Reserve on the sidelines at next month’s policy meeting if August’s inflation data do not worsen.

Core prices–which exclude food and energy costs–have risen 2.7% in the past year, the highest since late 2001. Core inflation is running about a half percentage point above the Fed’s comfort zone.

So far in 2006, core prices are rising at a 3.1% annual pace, a key reason why the Fed increased overnight interest rates at 17 straight meetings over two years before pausing last week.

Meanwhile, soaring energy costs pushed the total CPI up 0.4% in July, as expected by economists surveyed by MarketWatch. The economists were expecting core prices to rise 0.3%, although a sizable number were predicting the 0.2% rise that was reported.

The CPI is up 4.1% in the past year, compared with a 4.3% increase in the 12 months ending in June.

Higher prices offset wage gains in the month, the government said in a separate report. In the past year, real (that is, inflation-adjusted) earnings fell 0.1%. Real hourly earnings are down 0.5% in the past year.

In the CPI report, energy prices rose 2.9% in July. Gasoline prices rose 5.3%, while natural gas prices were flat. Energy prices are up 20.5% in the past year.

The other major source of inflation was in the shelter category, which accounts for 30% of the CPI. Rents and owners’ equivalent rent each rose 0.4% in July.

High house prices have forced more families into the rental market, pushing up rents. But because of the odd way the government measures the cost of owning a house, rising rents also mean a higher imputed cost for owning a home.

Elsewhere in the CPI, price increases were moderate. Food prices rose 0.2%, with big increases in fruit prices offset by falling poultry, beef and vegetable prices.

Medical care prices rose 0.2% in July. Transportation prices rose 1.6%, largely because of fuel prices. New vehicle prices rose 0.1%, while airfares rose 1.3%.

Apparel prices fell 1.2% in July, the biggest decline in 18 years. Apparel prices are flat over the past year.