U.S. consumer prices dropped in July for the first time in eight months as a sharp run up in gasoline costs reversed, the government said on Tuesday in a report suggesting the U.S. Federal Reserve can stick to a plan of gradual interest-rate rises. Separate reports showed industrial output and home building activity made comebacks last month after slumping in June, offering hope a recent economic soft spot would be transitory. The consumer price index, the most widely used gauge of U.S. inflation, slid 0.1 percent in July, the Labor Department said. It was the first drop since November and surprised Wall Street, where economists had looked for a 0.1 percent gain. The so-called core CPI, which strips out volatile food and energy costs, inched up 0.1 percent -- a touch below expectations -- as a big jump in costs for lodging away from home largely offset lower prices for apparel, new cars, recreation and communication. The tame readings were warmly received on Wall Street as traders guessed the Fed would not need to push up interest rates aggressively to head off inflation, as some had feared earlier this year. U.S. bond and stock prices rose. The dollar initially sagged, but ended up posting modest gains. "It really contradicts the argument that we're at the beginning of a long, grinds-higher inflation," said Ethan Harris, chief U.S. economist at Lehman Brothers in New York.
FIRMER GROUND
There were also encouraging signs on Tuesday that the economy could be emerging from a soft patch hit in June. The Fed said industrial production rose 0.4 percent last month after a downwardly revised 0.5 percent drop in June. The gain pushed the amount of productive capacity in use at U.S. factories, mines and utilities up to 77.1 percent. Economists had looked for stronger readings. However, the overall figure had gained despite being weighed down by a sharp 2 percent drop in utility output that economists pinned on cool weather, and the increases did suggest the industrial sector gained a little traction last month. Manufacturers pushed output up a solid 0.6 percent, despite a drop in the motor vehicle and parts production. Factories operated at 76.3 percent of capacity, their fastest pace since April 2001. Home builders provided another economic bright spot, as low mortgage rates continued to underpin activity. The Commerce Department said housing starts rose a healthy 8.3 percent to an annual rate of 1.978 million units in July. It was the biggest gain since September 2002 and outstripped expectations on Wall Street. Permits for future groundbreaking also rose in July, suggesting construction activity would stay strong.
OIL WILD CARD
The inflation report showed energy costs plunged 1.9 percent last month after hefty gains in the prior two months, Gasoline costs, which had climbed sharply in May and June, receded 4.2 percent, the biggest drop since November. But the price relief could be short lived. After falling in June, U.S. crude oil prices have resumed their upward march. On Tuesday, they closed just shy of a record high $46.95 a barrel hit earlier in the day. Last week, when Fed officials raised interest rates a quarter-percentage point to 1.5 percent, they said the run-up in energy prices was likely a big factor behind the slower U.S. economic growth in recent months. Still, they said the expansion appeared poised to gain steam and offered no sign of willingness to abandon a "measured" campaign of rate rises. The Fed is still expected to raise borrowing costs at its next meeting in September, although traders placing bets in the futures markets slightly scaled back the odds of a rate hike next month after the inflation data was released. Easing inflation in July had the effect of pushing up inflation-adjusted earnings. Real average weekly earnings, which posted a big 0.8 percent drop in June, rose 0.7 percent last month, according to a separate Labor Department report. Still, earnings have failed to keep pace with the acceleration in inflation over the last 12 months. Over that period, real weekly earnings are down 0.7 percent.///