Consumer Prices Hold Steady, Easing Inflation Fears

According to the August 15, 2009 New York Times article Consumer Prices Hold Steady, Easing Inflation Fears, Jack Healy reports that consumer prices were relatively steady in July 2009:

Consumer prices in the United States were steady last month, easing concerns for now that the record deficit and huge new government spending would spur inflation.

“It could be a very large long-run problem,” said Mickey Levy, chief economist at Bank of America. “But in the near term, it’s not a problem at all.”

The drift in prices suggests that enormous slack remains in the American economy, even as the recession bottoms out and some industries restart production. Retail sales are sluggish, 14.5 million people are unemployed and many factories and other businesses are still running below capacity.

The Labor Department reported Friday that its Consumer Price Index was unchanged from June on a seasonally adjusted basis, and that prices this summer were 2.1 percent lower than last July, when soaring oil costs drove gasoline to $4 a gallon and lifted the cost of food and other products.

The drop in the last year has been the largest in almost 60 years, occurring as the global economic crisis reduced demand for many goods and services.

“The inflation story was nonsense in an environment where you have such wild excess capacity globally,” said Robert Barbera, chief economist at ITG, an investment advisory business. “I think inflation is below 2 percent for the next two years.”

In another hopeful sign for the economy, the Federal Reserve reported on Friday that industrial production in the United States rose last month, suggesting that manufacturers and major industries were ramping up assembly lines and increasing output.

The monthly increase of 0.5 percent was the first since October, when production rebounded after Hurricane Ike as refineries and other industries came back on line. Before that, industrial production had not posted a gain since December 2007, the first month of the recession.

Economists had expected no change in consumer prices in July. Excluding volatile food and energy prices, the so-called core rate of inflation rose 0.1 percent, also in line with expectations.

“For all the inflation fear-mongering, the fact remains that prices have, in the near term, declined further rather than turned upwards,” Dan Greenhaus, chief economic strategist at Miller Tabak, said in a research note. “Such price action comes despite, among other things, a $787 billion stimulus package and $1.75 trillion in asset purchase by the Federal Reserve.”

Some economists and investors have warned that the government’s rescue plans and big stimulus spending will stoke inflation as the economy heals, setting off worries about the strength of the dollar and rising interest rates.

But economists said that Friday’s numbers showed that inflation remained subdued even as oil prices more than doubled since February and interest rates on government bonds crept back from record lows.

The Federal Reserve, in its statement on Wednesday after its two-day meeting, said it expected “that inflation will remain subdued for some time.”

In July, retail prices for food and beverages fell 0.2 percent from a month earlier while gasoline prices declined 0.8 percent. Housing costs fell 0.2 percent for the month, and were down 0.7 percent from last year.

The cost of clothing actually rose 0.6 percent, mostly because of increases in the price of shoes and women’s apparel.

Transportation and health care costs edged up 0.2 percent.