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Inflation Rises 0.1% in June, Easing Interest Rate Pressures

Economy: Biggest drop in energy prices in five years results in smallest CPI increase in seven months.

July 17, 1996|From Times Wire Services

U.S. consumer prices rose just 0.1% in June--the smallest increase in seven months--led by the biggest monthly drop in energy prices in five years, according to Labor Department figures released Tuesday.

The smaller-than-expected increase suggests inflation remained tame last month. That means the Federal Reserve Board, which left interest rates unchanged at its policy meeting last week, could do the same at its August meeting.

Anything under a 0.4% increase "is a mild rate of inflation," Nick Perna, chief economist at Fleet Financial in Hartford, Conn., said before Tuesday's report. "It's not the kind of thing that would provoke any sharp reaction in the markets or at the Federal Reserve."

The consumer price index core rate, which excludes often-volatile food and energy costs, rose 0.2% in June. Energy costs, which make up 7% of the consumer price index, fell 2.2% in June, their biggest monthly drop since March 1991.

Meanwhile, the Fed reported that industrial production rose a solid 0.5% in June after an identical gain in May and an even stronger 0.7% rise in April.

Analysts said the June increase in output was broad-based, with gains in production posted by a number of industries.

The report on prices at the retail level follows one last week that showed prices at the wholesale level also rose 0.2% in June.

During the first half of this year, consumer prices were rising at a 3.5% annual rate, up from a 3.2% pace in the first six months of 1995 and 2.5% for all of last year. Consumer prices excluding food and energy were rising at a 2.8% pace in the first six months of this year.

During May, the CPI increased 0.3% and the core rate rose 0.2%.

Analysts had generally expected a 0.2% increase in June's CPI and a 0.3% rise in the core rate.

Fed policymakers decided not to take the unpopular step of raising interest rates at their last meeting, July 2-3, just before the Labor Department announced unemployment in June had reached a six-year low.

Many economists believe the country is close to full employment, which could force employers to offer higher wages to compete for the workers they need. A 9-cent increase in average hourly wages during June was the highest on record.

Nevertheless, the Fed prefers to move on bad inflation news rather than good employment reports. June's wholesale price report was "not a bad inflation number," said Alan Blinder, a former Fed vice chairman.


Consumer Price Index

Percentage change, month to month, seasonally adjusted:

June 1996: +0.1%

Source: Bureau of Labor Statistics

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