U.S. Consumer Prices Climb by the Most Since 2005 (Update1)
By Shobhana Chandra
July 16 (Bloomberg) -- Prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food, intensifying the pressure on households struggling with falling home prices and the credit crunch.
The cost of living soared 1.1 percent, more than forecast, after a 0.6 percent gain the prior month, the Labor Department said today in Washington. Excluding food and energy, so-called core prices climbed 0.3 percent, also more than anticipated.
The figures underscore why Federal Reserve Chairman Ben S. Bernanke yesterday said inflation risks had ``intensified.'' The surge in energy costs has also trimmed consumer and business spending, hurting growth and making it less likely policy makers will boost interest rates to stem even bigger price increases.
``This is a problem for the economy; it's even worse for the Fed,'' said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. ``Inflation numbers are high enough that under different circumstances the Fed would be hiking rates. But given the state of the economy,'' it can't, he said.
Treasuries dropped after the report, with yields on benchmark 10-year notes rising to 3.87 percent at 9:41 a.m. in New York, from 3.82 percent late yesterday.
A separate report showed industrial production rose 0.5 percent in June from the previous month, more than forecast, after falling 0.2 percent in May. The increase was led by utilities, as manufacturing advanced just 0.2 percent.
Economists' Forecasts
Consumer prices were forecast to rise 0.7 percent, according to the median forecast of 79 economists in a Bloomberg News survey. Estimates ranged from gains of 0.2 percent to 1.1 percent. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.
Prices increased 5 percent in the 12 months to June, the most since May 1991. They were forecast to climb 4.5 percent from a year earlier, according to the survey median.
The core rate increased 2.4 percent from June 2007, also more than forecast.
Energy expenses jumped 6.6 percent. Gasoline prices soared 10.1 and fuel oil jumped 10.4 percent.
The cost of fuel will continue stoking price pressures. Crude oil futures reached a record $147.27 a barrel on July 11 and have risen almost 90 percent in the past year. Regular gasoline, which topped $4 a gallon for the first time in June, kept rising this month, AAA figures show.
The consumer price index is Labor's broadest gauge of costs. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.
Wholesale Costs
Wholesale prices rose 1.8 percent in June, the most in
seven months, the Labor Department reported yesterday.
>From a year ago, prices climbed 9.2 percent, the
biggest surge since 1981.
Food prices, which account for about a fifth of the CPI, increased 0.8 percent, driven by a gain in the cost of vegetables.
The report showed that food and fuel weren't the only items on the rise. Costs for airline fares jumped 4.5 percent. Prices for all commodities increased 1.9 percent.
Rents which, make up almost 40 percent of the core CPI, also accelerated. A category designed to track rental prices rose 0.3 percent after a 0.1 percent gain in May.
Today's figures also showed wages decreased 0.9 percent in June after adjusting for inflation, and were down 2.4 percent over the last 12 months. The drop in buying power is one reason economists forecast consumer spending will slow.
Impact on Spending
Americans trimmed purchases of automobiles, furniture and restaurant meals last month as the cost of gasoline soared, a Commerce Department report showed yesterday. Retail sales rose 0.1 percent, less than forecast, a sign the boost from the tax rebate checks is already fading.
Bernanke, testifying before Congress yesterday as part of his semi-annual report on the economy, cited ``significant downside risks to the outlook for growth'' in addition to the heightened threat of inflation.
Consumer spending is ``likely to be restrained over coming quarters,'' and businesses are ``likely to be cautious with their spending in the second half of the year,'' Bernanke said.
Companies, unable to fully recover ballooning raw-material costs by raising prices, have cut staff and reduced equipment purchases as profits shrink.
Kimberly-Clark Corp., the maker of Huggies diapers and Scott paper towels, said earnings for this year will trail its previous forecast as expenses rise more than twice as fast as predicted, In May, the company said it would raise prices for a second time this year to counter higher costs for materials such as oil, natural gas and pulp.
Pressure on Costs
``Inflation has outpaced our ability to offset higher costs in the near term through price increases, cost reductions and other measures,'' Thomas Falk, the Dallas-based company's chief executive officer, said this week in a statement.
Procter & Gamble Co., the maker of Tide detergent and Head & Shoulders shampoo, last week said it'll raise prices as much as 16 percent due to higher costs for plastic, energy and paper. The increases start in September and are the Cincinnati-based company's steepest in at least 18 months.
The consumer-price and wholesale-price reports reflect differences in timing. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1 at bloomberg.net Last Updated: July 16, 2008 09:46 EDT