Gas fuels higher prices: Core comes in under estimates

July 22, 2014 07:45 AM

The cost of living in the U.S. rose in June, paced by a jump in gasoline that is now reversing, bolstering Federal Reserve Chair Janet Yellen’s view that recent increases were temporary.

The consumer price index increased 0.3 percent after a 0.4 percent gain the prior month, matching median forecast of 85 economists surveyed by Bloomberg, figures from the Labor Department showed today in Washington. The core measure, which excludes volatile food and fuel costs, increased 0.1 percent, less than projected.

Inflation has failed to get a toehold as slowing global demand has prevented companies from exercising pricing power. If prices remain in check, Fed policy makers can keep interest rates low well into 2015.

“Inflation, at least for the moment, isn’t a problem,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who accurately forecast the change in core inflation. “We had a little bit of a scare, a minute of worry for a while there, but it’s basically going away.”

Stock-index futures held earlier gains after the report. The contract on the Standard & Poor’s 500 Index maturing in September climbed 0.4 percent to 1,974.3 at 8:36 a.m. in New York. The yield on the benchmark 10-year Treasury note was 2.48 percent compared with 2.47 percent late yesterday.

Survey results

Economists’ estimates in the Bloomberg survey ranged from a 0.2 percent drop to an increase of 0.4 percent.

The increase in the core gauge was the smallest since February and followed a 0.3 percent gain in May. Economists had forecast a 0.2 percent increase, according to the survey median.

Consumer prices rose 2.1 percent in the 12 months ended June, the same as in May. The core measure climbed 1.9 percent from June 2013, after a 2 percent increase in the prior 12-month period.

Gasoline costs jumped 3.3 percent, the biggest gain since June 2013, accounting for two-thirds of the increase in total prices, today’s report showed.

Falling fuel prices are giving households some relief after costs climbed earlier this year. Crude-oil futures on the New York Mercantile exchange have averaged $102.87 a barrel this month through yesterday, compared with $105.15 in June. Nonetheless, unrest in the Middle East and Ukraine caused prices to jump since the middle of the month.

Gasoline dropping

The average cost of regular gasoline has been falling, reaching $3.57 a gallon on July 20 after being as high as $3.68 on June 25, according to AAA, the biggest U.S. auto club.

Food costs increased 0.1 percent.

The core rate was held back by declines in the cost of new cars and hotel rates, which both dropped by the most since October 2013, today’s report showed.

Wal-Mart Stores Inc. (NYSE:WMT) plans to cut prices more aggressively during this year’s back-to-school season and will add inventory to its online store as the chain battles retailers for student spending.

The world’s largest retailer will reduce prices on 10 percent more items this year, Steve Bratspies, the Bentonville, Arkansas-based company’s executive vice president for U.S. general merchandise, said yesterday. The number of back-to- school items it sells online will increase 30 percent to 75,000, he said.

Broadest measure

Today’s consumer price index, which includes all goods and services, is one of three monthly inflation gauges from the Labor Department.

A measure of wholesale prices rose 0.4 percent in June, driven by the jump in energy costs that now is abating, Labor Department data showed last week. Compared with a year earlier, companies paid 1.9 percent more for goods and services, down from a 2 percent year-over-year increase in May.

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 1.8 percent in May from a year earlier, the most since October 2012. The central bank’s long-term goal is to keep prices rising at around 2 percent.

The increase in prices has taken a bite out of paychecks. After adjusting for inflation, hourly earnings were unchanged on average in June and were down 0.1 percent from a year earlier, another Labor Department report showed today.

Last week, Yellen repeated her belief that the labor market shows “significant slack” and inflation remains below the Fed’s goal.

The central bank has been dialing back its monthly bond purchases as the economy recovers and is on track to end them completely in October.

While the consumer price index has been “a bit on the high side”, Yellen said, the data can be noisy. Broadly speaking, inflation “is evolving in line with the committee’s expectations.”

About the Author