Originally created 08/15/97

Consumer prices post small increase



WASHINGTON (AP) - Consumer prices edged up 0.2 percent in July, a modest rise but still the biggest advance in five months led by higher food costs. Prices so far this year are rising at just a 1.5 percent annual rate, less than half the gain in 1996.

Today's report at first was welcome news on Wall Street. But a rally fizzled and the Dow Jones average of industrial stock prices fell 25 points by mid-afternoon. Amid worries over inflation and rising interest rates, the index fell below 8,000 this week for the first time since July 21.

Financial markets have been edgy in recent days as government and private reports show an economy that is rebounding from a second-quarter lull.

The Labor Department said the increase in its Consumer Price Index was the largest since a 0.3 percent advance last February. Increases in each of the following four months were just 0.1 percent.

Many analysts had expected the July increase.

The 1.5 percent annual rate of increase so far this year compares with an inflation rate of 3.3 percent for all of 1996.

In other reports, the Federal Reserve said industrial production in July grew 0.2 percent, slightly slower than June, due to a drop in automobile output as production lines were shut down for annual new-model retooling. Meanwhile, warmer weather and increased use of air conditioning translated into a 1.5 percent increase in utility output.

The nation's industries operated at 83.1 percent of capacity, well below a level that typically could mean inflation-causing bottlenecks.

The Commerce Department reported a surge in business inventories last month - the biggest in more than two years - that was matched by an identical 0.7 percent rise in sales. The report points to continued solid growth as sales keep pace with production.

The Labor Department also said new claims for jobless benefits rose by 12,000 last week to a seasonally adjusted 316,000, highest in four weeks. Still, the number of applications for unemployment insurance remained in a range that analysts say is consistent with a tight labor market.

Indeed, the four-week average of new claims fell for a fifth straight week to its lowest level since midwinter 1989. Analysts prefer to track the less-volatile four-week average because it smooths out the spikes in the weekly reports.

The July increase in consumer prices was held back by a 0.1 percent dip in energy costs. It was the fifth straight month that energy prices failed to rise.

The so-called core inflation rate - excluding the volatile food and energy costs - also rose 0.2 percent, up slightly from a 0.1 percent gain in June. That translated into a 2.4 percent annual rate of increase so far this year compared with 2.6 percent in 1996. Food prices climbed 0.3 percent.

The department reported Wednesday its Producer Price Index, which measures prices before they reach the consumer, fell a seasonally adjusted 0.1 percent in July for an unprecedented seventh straight decline.

The PPI report also showed there were no inflationary pressures in the pipeline.

Although inflation remains contained, many analysts fear it could ignite from rapid economic growth and prompt the Federal Reserve to raise short-term interest rates.

Fed officials meet again next week. While most analysts don't expect a rate increase, some believe it could come at meetings in September or October if the economy surges.

The jump in food prices was led by increases of 2.2 percent for fresh vegetables, 0.8 percent for poultry and 0.7 percent for beef. Lettuce prices were up 6.6 percent, coffee 3.1 percent.

But the cost of tomatoes was down 11.7 percent and pork 0.3 percent.

Natural gas was the only energy component posting an increase, up 1.1 percent. Prices for fuel oil were down 2.9 percent; gasoline, 0.4 percent, and electricity, 0.2 percent.

Medical care costs were unchanged in July and automobile prices were up just 0.1 percent, reflecting widespread discounting. Housing costs increased 0.2 percent and entertainment 0.1 percent.

Airline fares shot up 2.3 percent after falling 1.3 percent in May and 1.2 percent in June.