U.S. Consumer Prices Excluding Food, Energy Climb as Manufacturing Stalls

Photographer: Stephen Wilkes

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Photographer: Stephen Wilkes

Checkout counters at a Wal-Mart in New Jersey.

A measure of consumer prices climbed more than forecast in June and manufacturing stalled, highlighting the dilemma faced by Federal Reserve policy makers as they seek to boost growth without stoking inflation.

Consumer prices excluding food and energy climbed 0.3 percent for a second month, the biggest back-to-back gain in three years, the Labor Department said today in Washington. Factory production was unchanged last month, data from the Fed showed.

An unexpected decline in consumer sentiment, also reported today, signaled that households are being squeezed by mounting unemployment, rising costs and a slumping housing market. At the same time, the pickup in prices makes it more difficult for the Fed to adopt fresh measures to spur growth.

“There’s little additional action that the Fed can take right now,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “The critical issue is whether consumer spending improves or stays quite weak.”

The Standard & Poor’s 500 Index rose 0.6 percent to 1,316.14 at the 4 p.m. close in New York. The yield on the 10- year Treasury note fell to 2.91 percent from 2.95 percent late yesterday.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.8, the lowest reading since March 2009, from 71.5 the prior month. The gauge was projected to rise to 72.2, according to the median forecast of economists surveyed by Bloomberg News.

Additional Action

Fed Chairman Ben S. Bernanke told Congress this week that the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling.

“We have to keep all the options on the table,” Bernanke said in semi-annual testimony to the House Financial Services Committee. The “economy still needs a good deal of support.”

At the same time, Bernanke said there is also the possibility that inflation could pick up in a way that would require the Fed to begin tightening credit and exit its record monetary stimulus.

The biggest drop in energy costs since 2008 masked growing inflation in other goods and services like autos, clothing and hotel rates, today’s Labor Department report showed. Including food and energy, the consumer-price index decreased 0.2 percent, the first drop in a year, compared with the 0.1 percent drop forecast by economists.

The so-called core consumer price index, which excludes volatile food and energy costs, was forecast to increase 0.2 percent in June.

Overall Prices

Overall prices increased 3.6 percent in the 12 months ended June, the same as the year-over-year gain in May. The core CPI rose 1.6 percent from June 2010, the most since January 2010.

Energy costs decreased 4.4 percent from a month earlier, the biggest decline since December 2008. Food costs climbed 0.2 percent, the smallest advance this year.

Apparel costs jumped 1.4 percent, the biggest surge since March 1990. Lodging away from home, which includes hotel rates, soared 3 percent after a 2.9 percent gain in May, while the cost of a new car increased 0.6 percent.

It’s too early to predict how consumers will react to increased prices, according to Levi Strauss & Co. Chief Financial Officer Blake Jorgensen. Levi Strauss, the closely held maker of blue jeans and Dockers pants, boosted prices in the first three months of the year as cotton costs soared.

Food, Gasoline

“We haven’t seen the full impact of apparel prices on the consumer,” Jorgensen said in a July 12 call with analysts. “When you combine that with some of the continued pressure with the consumer on general products, food, gas, commodities that they are experiencing and no job growth, we’re still cautious here in the U.S.”

Bernanke told Congress this week that “most of the recent rise in inflation appears likely to be transitory.” Stabilization of oil prices and other commodities, along with slack in the labor market, indicates inflation will moderate, Bernanke said.

Fed policy makers aim for long-run overall inflation of 1.7 percent to 2 percent, according to their June forecast. Their preferred price gauge, which excludes food and fuel, rose 1.2 percent in May from a year earlier.

The jump in auto prices may reflect shortages in parts caused by the tragedy in Japan, indicating costs may level off as the imbalances are corrected, economists said.

Auto Parts

“We will have sufficient auto parts later in the year and oil prices are coming down, so that impulse on core prices will fade,” Kevin Harris, chief economist at Informa Global Markets in New York, said before the report.

Manufacturing, which accounts for about 12 percent of the economy, may be restrained by slower consumer demand and a buildup in inventories even as automakers rebound from parts shortages after the Japan earthquake.

Overall industrial production, which adds mining and utilities to manufacturing, increased 0.2 percent in June after a revised 0.1 percent decrease the prior month, today’s Fed report showed. Economists projected a 0.3 percent rise in June.

Capacity utilization, which measures the amount of a plant that is in use, held at 76.7 percent in June. The gauge compares with the average of 79.5 percent over the past 20 years.

Production of automobiles and parts fell 2 percent, the Fed report showed. Excluding autos, manufacturing rose 0.2 percent after a 0.1 percent increase.

Toyota Motor Corp. and Honda Motor Co.’s U.S. deliveries each fell 21 percent in June from a year earlier, while General Motors Co. and Ford Motor Co. saw sales gain 10 percent, less than estimates, according to industry data on July 2.

“When considering the headwinds that we faced this month, June was fairly decent, comparing it year-over-year,” GM’s vice president for U.S. sales Donald Johnson said on a conference call July 1.

To contact the reporters on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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