WASHINGTON – Consumers who bought new cars last month enjoyed the biggest drop in prices in 30 years. They weren’t so lucky when they went to fill them up, as gasoline prices soared.
A big jump in energy costs sent inflation racing ahead in July after two quiet months. However, price pressures were not as worrisome as the 0.5 percent overall increase in the Consumer Price Index would indicate.
It was almost all energy. Outside of energy and food, costs were up a much more modest 0.1 percent last month.
Clothing costs fell for the third month out of the past four, reflecting a continued flood of imports of low-cost clothes from China now that global quotas have expired.
New car prices dropped by 1 percent, the biggest decline since January 1975, reflecting the fact that automakers, eager to unload a backlog of unsold cars, offered shoppers the same discounts that their employees receive.
However, gasoline pump prices were up 6.1 percent, helping to push overall energy prices up by 3.8 percent after two months of declines.
Analysts said gasoline will be up even more in August, reflecting the fact that average prices nationwide rose to $2.55 per gallon last week, a time when global oil prices were setting new records of around $67 per barrel.
“Energy is a killer, but if you don’t use it, you’re not seeing a whole lot of inflation,” said Joel Naroff, chief economist at Naroff Economic Advisors.
So far this year, inflation is rising at an annual rate of 3.5 percent, little changed from last year’s 3.3 percent gain, while core inflation, excluding food and energy, is up just 2.2 percent.
Davis Wyss, chief economist at Standard & Poor’s in New York, said one reason energy has not had much impact on the overall inflation rate is that it is being offset in part by cheap imports of other foreign goods. He added that the amount of energy needed to keep the country running is less now than during the oil shocks of the 1970s and 1980s.
“Energy just isn’t as big relative to the economy as it was 25 years ago,” Wyss said.
However, the energy price increases have investors worried. On Wall Street, stocks tumbled after Wal-Mart Stores said higher gasoline prices had curbed consumer spending. The Dow Jones industrial average dropped 120.93 points to close at 10,513.45.
In other economic news Tuesday, the Commerce Department reported that construction of new homes and apartments totaled 2.042 million units in July. While that was down a slight 0.1 percent from June, it marked the eighth month in the past 10 that housing construction has been above the 2 million mark, reflecting frenzied activity on the part of builders to keep up with record demand.
Even manufacturing, the weakest part of the economy, managed to post a 0.1 percent rise in industrial production in July, according to a Federal Reserve report. Analysts said the gain would have been much stronger except for a drop in mining output reflecting hurricane-related shutdowns of oil platforms in the Gulf of Mexico, and retooling in the auto industry.
“Housing, the strongest part of the economy, is still booming, and manufacturing, the weakest part, should gain strength in coming months,” said Mark Zandi, chief economist at Economy.com. “Put it all together and it paints a pretty economic picture of solid growth and low inflation.”
Wyss predicted the economy will grow at an annual rate of 4.5 percent in the current quarter, far above the 3.2 percent April-June increase, as businesses increase production to restock depleted inventories and home construction remains at high levels.
David Seiders, chief economist for the National Association of Home Builders, said he looked for construction activity to remain strong for the next few months as builders struggle to meet demand.
“The market is still very, very strong,” he said.
For July, housing construction was up in all parts of the country except the South, which had a decline of 5.4 percent.
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On the Net:
Consumer prices: http://www.bls.gov/cpi/
Industrial production: http://www.federalreserve.gov
Housing construction: http://www.census.gov/const/www/newresconstindex.html
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