Inflation in U.S. Probably Began Stabilizing in July, Backing Fed Forecast

The cost of living in the U.S. probably eased in July, consistent with the Federal Reserve’s forecast that inflation will stabilize, economists said before a report this week.

Consumer prices excluding volatile food and fuel costs climbed 0.2 percent, the smallest gain in three months, according to the median forecast in a Bloomberg News survey of economists before Labor Department data on Aug. 18. Housing remained depressed, while a surge in utility use boosted industrial production, other figures may show.

Lower costs for energy and other commodities may give companies like Sara Lee Corp. (SLE) room to hold the line on retail prices, providing some relief to consumers faced with stagnating incomes and limited job growth. Less inflation also affords Fed officials the scope to ease monetary policy further should the recovery falter.

“Commodity costs have come down and will start to flow through the supply chain down to consumers,” said Russell Price, a senior economist at Ameriprise Financial Services Inc. in Detroit. “It gives the Fed more time to wait and see how things play out in the economy.”

The consumer price index including food and energy climbed 0.2 percent in July after a 0.2 percent decrease, according to the Bloomberg survey of 68 economists. Compared with the same month last year, the price measure increased 3.3 percent, down from a 3.6 percent gain in the 12 months to June, the survey showed.

Informal Target

The core CPI index, which excludes food and fuel, rose 1.7 percent over the past 12 months after a 1.6 percent year-over- year increase in June. The Fed’s informal target range for longer-term core inflation is 1.7 percent to 2 percent as measured by the gauge tied to consumer spending.

With the economic recovery showing signs of stress, the Fed on Aug. 9 pledged to keep its benchmark interest rate at a record low at least through mid-2013.

The “downside risks to the economic outlook have increased,” the Federal Open Market Committee said in a statement. “Inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate” of maximum employment and price stability.

Inflation in unlikely to accelerate as unemployment at 9.1 percent restrains consumer spending. Sara Lee, the Downers Grove, Illinois-based maker of food products such as Jimmy Dean sausages, said it raised prices in the year ended July 2 to recoup commodity costs, and may not need to do much more.

Protecting Share

“As we start the new year, we have all the price increases in place to deal with the commodity costs as we currently see them,” Marcel Smits, chief executive officer, said on an Aug. 11 conference call with investors. “That means that we have some firepower to, where necessary, dial back at a tactical level on prices wherever we need it in order to protect our share.”

The CPI is the broadest of three price gauges from the Labor Department. Economists forecast the import-price index, the first of the three for the month and due Aug. 16, fell for a second straight month in July. A day later, figures may show prices paid to producers rose 0.1 percent after falling 0.4 percent.

Lower prices would help ease the burden on household finances at the same time companies remain reluctant to step up hiring. Employment in the last three months averaged 72,000 compared with 215,000 from February through April, Labor Department data shows.

Weak Link

The housing market remains the economy’s weakest link. The Commerce Department may report on Aug. 16 that housing starts dropped 4.6 percent to a 600,000 annual pace in July, according to the Bloomberg survey median. Permits, a sign of future construction, probably declined 1.9 percent from June.

Sales of previously owned houses, due from the National Association of Realtors on Aug. 18, rose last month after slumping to a seven-month low in June, economists predicted.

The recovery from supply-chain disruptions related to Japan’s natural disaster earlier this year is helping support manufacturing, which accounts for about 12 percent of the economy. Industrial production, to be released by the Fed on Aug. 16, grew 0.5 percent in July after a 0.2 percent gain in June, the Bloomberg survey showed.

The figures may also reflect a surge in utility use as temperatures across the U.S. soared, with July records in Texas and Oklahoma, according to the National Climatic Data Center. July temperatures were “above normal” or “much above normal” in 39 of the other 48 contiguous U.S. states. Last month was the fourth-warmest July in 117 years, the agency said.

                        Bloomberg Survey


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                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
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Empire Manu. Index        8/15      Aug.      -3.8      0.0
NAHB Housing Index        8/15      Aug.       15        15
Housing Starts ,000’s     8/16      July      629       600
Housing Starts MOM%       8/16      July     14.6%     -4.6%
Building Permits ,000’s   8/16      July      617       605
Building Permits MOM%     8/16      July      1.3%     -1.9%
Import Prices MOM%        8/16      July     -0.5%     -0.1%
Ind. Prod. MOM%           8/16      July      0.2%      0.5%
Cap. Util. %              8/16      July     76.7%     77.0%
PPI  MOM%                 8/17      July     -0.4%      0.1%
Core PPI MOM%             8/17      July      0.3%      0.2%
CPI  MOM%                 8/18      July     -0.2%      0.2%
Core CPI MOM%             8/18      July      0.3%      0.2%
Initial Claims ,000’s     8/18     12-Aug     395       400
Exist Homes Mlns          8/18      July      4.77      4.90
Exist Homes MOM%          8/18      July     -0.8%      2.7%
Philly Fed Index          8/18      Aug.      3.2       3.5
LEI  MOM%                 8/18      July      0.3%      0.2%
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To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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