Inflation, Industrial Data: A Mixed Bag

The CPI's 1.1% June climb was higher than expected, but analysts also didn't anticipate the increase in U.S. industrial output

By BusinessWeek, Standard & Poor's, and Action Economics staff

Two economic reports released July 16 reaffirmed the market's concerns about the pace of inflation, but also provided a modest upside surprise on U.S. industrial sector activity.

The U.S. consumer price index (CPI) jumped 1.1% in June, well above the 0.7% that markets expected and the 0.6% pace in May. The core rate, excluding food and fuel, was up 0.3%. Markets expected the core to hold at 0.2%, the same pace as in May.

Headline CPI accelerated to a 5.0% pace over last year (the highest rate since 1991), vs. 4.2% in May. The core rate is now at a 2.4% pace, up from 2.3% previously. Energy price gains again explained the jump in consumer prices, rising 6.6% in June, and are up 24.7% over last year. Food and beverage prices were up 0.7% on the month and are up 5.2% over last year. The only decline in the report was in personal computers.

"The broad-based acceleration in consumer prices is bad news for bonds and the [Federal Reserve]. We still expect the Fed to keep rates at 2.0%, until the recovery is in place, though the news today makes that plan a bit harder to achieve," wrote Standard & Poor's senior economist Beth Ann Bovino in a July 16 note.

"[T]he data will continue to be a major thorn in the side of the Fed, which is struggling to contain credit market fallout and sustain growth in the economy, where the policy prescription is incompatible with keeping inflation in check," wrote analysts in a posting on Action Economics' Web site.

Industrial Uptick

But if the inflation numbers were discomfiting, a report on output at U.S. factories, farms, and mines provided some cheer. U.S. industrial production rebounded 0.5% in June, well above the flat reading expected by markets and the 0.2% drop reported a month ago. This brought capacity utilization up to 79.9% from 79.6% in May (revised from 79.4%). The manufacturing index rose 0.2%, after falling 0.1% in May (revised from a flat reading previously). Output at utilities rose 2.1%, erasing the revised 2.1% drop the prior month (previously -1.8%). Mining rose 1.1% vs. 0.3% in May (revised up from 0.1%).

How did financial markets receive the reports? Major U.S. stock indexes were mixed in early trading on July 16, with the Dow industrials posting slight losses while the S&P 500 and Nasdaq composite indexes were up modestly. U.S. Treasuries extended earlier losses, while the dollar reacted positively to the stronger than expected industrial production and capacity utilization results.

The market's focus will now shift to Fed Chairman Ben Bernanke's Q&A following his July 16 testimony to the House Financial Services Committee, according to Action Economics.

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