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The Honolulu Advertiser

Posted at 11:16 a.m., Wednesday, July 18, 2007

U.S. inflation has smallest increase in five months

AP Economics Writer

WASHINGTON (AP) — Food costs kept rising in June, but motorists finally got some relief at the gas pump, helping to lower inflation to the smallest increase in five months.

The Labor Department reported Wednesday that consumer prices edged up by 0.2 percent in July. That was the best showing since January and far below the 0.7 percent surge of May, the biggest jump in nearly two years.

But with the use of corn for ethanol pushing up food costs and gasoline prices rising again in July, economists said the moderation in inflation could prove temporary.

Federal Reserve Chairman Ben Bernanke, delivering the Fed's midyear economic report to Congress, said the Fed perceived inflation as its "predominant" concern.

The Fed closely watches core inflation, which excludes volatile energy and food costs. Those prices rose by 0.2 percent in June, extending a trend of moderation. The rise in the energy and food sectors has not led to wider inflationary problems.

As long as this continues, analysts said, the Fed will remain on hold on interest rates probably into 2008. The Fed has not changed rates for more than a year.

Wall Street did not react to the inflation report, which was in line with expectations. The report did not cause worries that rising inflation could get the Fed to resume raising rates to slow economic growth.

In a separate report, the Commerce Department said housing construction rose 2.3 percent in June to a seasonally adjusted annual rate of 1.467 million units.

Analysts discounted the unexpected increase, noting that applications for building permits fell 7.5 percent, more than double the decline forecast. Permits are considered a better indicator of future trends.

Bernanke said the slump in housing "will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time."

On inflation, Bernanke noted that core inflation has "moderated slightly" in recent months. But he added that some improvement might result from temporary factors.

Bernanke defended the Fed's use of core inflation rather than the overall inflation figure, which includes energy and food. He said the core figure was a better gauge of underlying inflation trends and more useful in forecasting.

Private economists, however, said that explanation probably would offer little comfort to people struggling to pay their gas and grocery bills.

"There is a growing gap between how the Fed and investors see inflation and how the average American feels about it," said Mark Zandi, chief economist at Moody's Economy.com.

The 0.2 percent rise in overall prices in June reflected a 1.1 percent decline in gasoline prices. Total energy costs fell by 0.5 percent and offset a 0.5 percent rise in food costs, particularly for milk and other dairy products.

The moderation in consumer inflation in June did provide a boost for workers' paychecks. Weekly earnings rose by 0.5 percent, the best showing in eight months. Wages for nonsupervisory workers, after adjusting for inflation, had fallen in four of the previous five months this year.

Gasoline prices, which hit a record of $3.23 in late May, fell by 1.1 percent in June, the first drop since a 3 percent decline in January. Pump prices, however, have risen again in early July.

Overall prices climbed by an annual rate of 5 percent in the first six months of this year, compared with a 2.5 percent rate in the last half of 2006. Two-thirds of the 2007 acceleration came from the jump in energy and food costs.

Outside of food and energy, prices have remained moderate. For June, clothing prices fell by 0.6 percent and new car prices were flat. Airline ticket prices jumped by 0.9 percent.

Core inflation was running at an annual rate of 2.3 percent in the first six months of this year, an improvement from a 2.6 percent rate of increase in the last half of 2006.