U.S. Economy: Consumer Prices Climb, Manufacturing Falters

The cost of living in the U.S. climbed more than forecast in July, which could make it harder for Federal Reserve Chairman Ben S. Bernanke to convince colleagues to immediately act to spur growth after manufacturing in the Philadelphia region plunged in August.

The consumer-price index increased 0.5 percent from June, more than twice the 0.2 percent median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The Philadelphia Fed’s general economic index dropped to minus 30.7 this month, the lowest since March 2009, when the economy was in a recession.

Stocks slumped and gold prices soared to a record as the data showed the world’s largest economy was in danger of shrinking even as inflation picked up. Another report showed fewer Americans on average filed claims for unemployment benefits over the past month, indicating the job market is holding up for now.

“There’s a tremendous loss of momentum,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston, who projected manufacturing would contract. “Increasing evidence that the economy is drifting closer to a recession could prompt Chairman Bernanke into action before year-end,” Herrmann said. At the same time, Herrmann said, the cost-of-living data may limit his options: “The inflation figures don’t yet give the Fed the ammunition to roll out a new round of non-conventional monetary easing.”

Shares Plunge

The Standard & Poor’s 500 Index dropped 4.5 percent to 1,140.65 at the 4 p.m. close in New York on signs the economy is slowing and European banks lack sufficient capital. Treasury securities surged, sending the yield on the benchmark 10-year note down to 2.08 percent from 2.17 percent late yesterday, and gold futures for December delivery reached an intra-day high of $1,832 an ounce.

Other reports today showed the residential real-estate market continues to stagnate and consumers’ economic expectations plunged. Additionally, the index of leading indicators climbed, boosted by an increase in money supply that may reflect a flight to safety.

Figures from the Labor Department today showed the average number of workers filing applications for jobless benefits over the past four weeks dropped to 402,500, the lowest since April 16. The weekly readings, which tend to be more volatile, showed claims climbed by 9,000 to 408,000 in the period ended Aug. 13, the highest in a month.

These data are “not recession material,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., in New York. The plunge in stocks in recent weeks “could start to worry businesses enough for them to lay off workers,” Rupkey said. Nonetheless, claims show “this is not happening yet, but we need to watch closely for the next couple of weeks.”

Depths of Recession

The number of applications reached 659,000 in late March 2009 at the depths of the last recession.

Consumer prices were pushed higher by rising costs for fuel that have since retreated, and by an increase in food expenses. Excluding energy and food costs, which are usually more volatile, the so-called core gauge rose 0.2 percent, pushing the increase over the past year to a greater-than-projected 1.8 percent. It was the biggest 12-month gain in more than a year.

The Fed’s informal target range for longer-term core inflation is 1.7 percent to 2 percent as measured by a Commerce Department 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 and said it is “prepared to employ” policy tools to promote growth.

Fed Debate

Rising inflation may intensify debate among policy makers after three regional Fed Bank presidents voted against last week’s decision, the most dissent in almost 19 years.

The forecast gain in consumer prices was based on the median of 86 economists in a Bloomberg survey. Estimates ranged from a decline of 0.1 percent to a gain of 0.6 percent.

The results included a jump in rents, the biggest component of CPI, and increases in apparel, tobacco and medicines. Mounting foreclosures are reducing homeownership while boosting demand for rental housing.

Sales of previously owned homes unexpectedly dropped in July, reflecting an increase in contract cancellations due to strict lending rules and low appraisals, according to a report today from the National Association of Realtors. Purchases decreased 3.5 percent to a 4.67 million annual rate, the weakest since November. About 16 percent of real estate agents polled said they had at least one pending contract canceled last month.

Growing Pessimism

Consumer confidence in the economic outlook slumped in August to the lowest level since the recession, another report showed. The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 34, the weakest since March 2009, from minus 22 in July. The weekly measure of current conditions was minus 48.3 for the period ended Aug. 14 compared with minus 49.1, which was the worst reading since mid-May.

Shoppers at Wal-Mart Stores Inc. (WMT), the world’s largest retailer, continue to be “strained” by economic conditions, Charles Holley, chief financial officer at the Bentonville, Arkansas-based company, said in a conference call with reporters this week. Consumers’ biggest concern is unemployment, rather than fuel or food costs, he said.

Also today, the Conference Board’s gauge leading economic indicators, a measure of the outlook for the next three to six months, climbed 0.5 percent after a 0.3 percent gain in June, the New York-based research group said.

A flight to cash in a bid for safety from volatile equity markets likely boosted the money supply last month signaling that the increase may reflect lagging investor confidence.

“With the exception of money supply and interest rate components, other leading indicators show greater weakness -- consistent with increasing concerns about the health of the economic expansion,” Ataman Ozyildirim, an economist at the Conference Board, said in a statement.

To contact the reporter on this story: Shobhana Chandra at schandra1@bloomberg.net

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

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