U.S. consumer prices rose at their fastest clip in three months during June, with most of the advance powered by rising gasoline prices and a record spike in the price of natural gas, the government said yesterday.
However, the "core" rate of the Consumer Price Index - derived by factoring out volatile energy and food costs - was a reasonably tame 0.2 percent for the month, showing that inflation has still not surfaced to any worrisome degree during the record American economic expansion, experts said.
"All in all, there's little evidence of inflation," said Richard Yamarone, chief economist for Argus Research in New York. "And when you look at core inflation, there's even less evidence that inflation has spilled out into the consumer sector."
Determining whether inflation is accelerating is crucial, since that's the key guidepost the Federal Reserve is using as it prepares to decide whether to raise short-term interest rates for the seventh time in 14 months.
Stock prices slipped yesterday, and economists said the decline partly reflected fear that the CPI report might keep Fed leaders on edge about inflation.
The overall CPI - the most closely watched inflation indicator - rose 0.6 percent in June, slightly ahead of the consensus estimate of 0.5 percent put forth by economists. That was the biggest jump since the measure rose 0.7 percent in March. The CPI rose 0.1 percent in May.
4.2% through June
Through June, overall consumer prices had advanced at a 4.2 percent annual rate.
The CPI is important to watch because consumer spending accounts for more than two-thirds of all economic activity in the United States. If prices rise, shoppers' dollars don't stretch as far - which, over time, could translate into an overall slowdown in economic activity. After all, if consumers aren't spending as much, companies can't generate higher sales, which ultimately could lead to falling corporate profit, layoffs, and a drop in stock prices.
Many economists say that scenario won't play out anytime soon, though. The big jump in the overall CPI was due to a 5.6 percent increase in energy prices, which make up 10 percent of the index. Natural gas surged ahead by 7.8 percent in June, the biggest increase on record. And prices at the gasoline pump rose 8.8 percent, the biggest spike there since an 11.1 percent increase in March.
With energy prices excluded, the inflation picture looks a lot less ominous. The 0.2 percent increase in the core rate of the CPI for June matched the increase for May. When viewed in conjunction with last week's report that producer prices - excluding energy costs - had dropped, the CPI report is further proof that inflation is in check, economists say.
Producer prices - that is, prices at the wholesale level as measured by the Producer Price Index - generally aren't showing the kind of buildup that would force companies to pass their increased costs along to consumers in the form of higher prices for goods and services, the report showed.
"Inflation is still under control," said Christopher Low, chief economist at First Tennessee Capital Markets in New York.
Economists can say all they want that inflation isn't a problem, but it's what the Federal Reserve believes that really matters. The Fed, having raised interest rates six times since June 1999, next meets Aug. 22. At their meeting last month, central bank policymakers opted to hold the line on interest rates, and stocks - particularly once-bloodied technology shares - have been on the advance pretty much ever since.
Yesterday, stocks slid back on fears that the Fed, led by avowed inflation-fighter Alan Greenspan, might not interpret yesterday's CPI report in the same positive fashion as economists.
The Dow Jones industrial average fell 64.35 points to close at 10,739.92 yesterday. The technology-laden Nasdaq composite index dropped 97.50 points to 4,177.17.
Some analysts said there was good reason for the slide.
"I don't think the Fed can safely go to sleep for another couple of quarters," said Tim O'Neill, chief economist for Bank of Montreal and Harris Bank.
Buttressing investor fears is a bit of anecdotal evidence that runs counter to the government figures in hinting that prices could well be on the rise, some economists say.
Hertz Corp., the world's largest car-rental company, said it is raising the daily rental rates on some cars by $3 per day and $10 per week.
And some trucking companies, hoping to offset the profit-eroding rise in fuel prices, have announced plans to increase shipping rates.
But there's no guarantee that these price increases will stick. Very often in recent years, companies have announced price increases on products or services, only to back off when it becomes clear that customers are willing to shift their business to rivals.
For instance, Goodyear Tire & Rubber Co. boosted some tire prices in April. The result: Overall industry prices weakened and sales fell, even though raw materials' prices remain on the march.
"Consumers continue to show that they are incredibly price-conscious," said Steve Wood, senior economist at Banc of America Securities in San Francisco.
Wire services contributed to this article.