Inflation Slowed in August, Reflecting a Weak Economy

The Labor Department announced that the consumer price index rose .4 percent last month. Other reports released showed weakness in the jobs market and an uncertain outlook for manufacturing. The latest figures also show that inflation is set to outpace wage growth.

By CHRISTINE HAUSER
Published: September 15, 2011
NY Times

The rate of inflation in the United States slowed slightly in August, when a rise in food prices was tempered by easing prices for gasoline and automobiles, according to government statistics released on Thursday.

The Labor Department said that the Consumer Price Index rose 0.4 percent last month, a slight deceleration compared with the 0.5 percent rise in July.

The index, although it reflects just one month of data, is one of a number of closely watched indicators that guide economists and financial market analysts assessing the state of the economy. Other economic reports released on Thursday showed weakness in the jobs market and an uncertain outlook for manufacturing.

“The story is very much the same: that economic growth is slow,” said Kurt J. Rankin, economist for PNC, about Thursday’s data. “But because consumer confidence and business sentiment are both weak and remain weak, positive but slow growth is edging toward stagnation.”

The inflation figures for August reflected the volatility in prices for items such as food and energy. Prices for gasoline moderated, with a 1.9 percent rise in August after a 4.7 percent jump in July. Food prices rose 0.5 percent compared with 0.4 percent in July.

When those components were stripped from the index, the core C.P.I. showed that prices rose in August at the same rate as in July, 0.2 percent. That was in line with analysts’ forecasts in a survey compiled by Bloomberg News.

On a year-over-year basis, the core C.P.I. was up 2 percent in August compared with 1.8 percent in July.

Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide, said that the August C.P.I. number was consistent with expectations, such as with automobile prices, which were basically flat in August.

“Those pockets of weakness were in areas already expected and known,” he said.

Of more importance to investors were events in the European debt crisis and speculation as to what Federal Reserve policy makers would say after a meeting next week, Mr. Ballew said. Although the chairman of the Fed, Ben S. Bernanke, has given no sign that there would be fresh stimulus measures, market watchers were anticipating any measures that would help promote the economic recovery in the United States, especially in the critical sectors of jobs and housing.

Mr. Rankin said that the year-over-year core C.P.I. was 2 percent, bumping up against the Fed’s target rate.

“Initially Bernanke’s goal has been to prevent deflation,” Mr. Rankin said. But the central bank cannot raise rates, he added, because it would slow economic activity.

In addition, the latest figures show that inflation is set to outpace wage growth, which would be a “significant blow” to potential economic growth because 70 percent of the economy is based on consumer spending, Mr. Rankin said.

“Even those with jobs are not able to put that money back into the economy in a way that would create jobs,” he said. “Now we are getting to the point with this inflation number, even those with jobs are less capable of driving economic activity.”

A weekly report from the Labor Department on Thursday suggested that the labor sector was continuing to struggle. For the second consecutive week, initial claims for jobless benefits rose, increasing by 11,000 in the week ended Sept. 10 to 428,000. That was up from the previous week’s 417,000, which was revised up from 414,000.

Economists generally take any level over 400,000 as a continued sign of weakness in the labor market.

Joshua Shapiro, chief United States economist at MFR Inc., said in a research note that the latest claims figures were another indication that there was “little or no upward impetus” to net gains in payroll employment.

In addition, the Federal Reserve reported on Thursday that industrial production increased 0.2 percent in August after having advanced 0.9 percent in July.

Total industrial production for August was 3.4 percent above its year-earlier level, the Fed added.

Manufacturing, an important component in the data that economists looked to for its role in jobs and the economic recovery, rose 0.5 percent, the Federal Reserve report said.

Cliff Waldman , an economist for the Manufacturers Alliance, said that the August report on industrial production showed that the United States manufacturing sector was at a crossroads, with a rebound from the Japanese earthquake on one side against a slowdown in global economic activity on the other.

Despite sold gains in aerospace and furniture output, for example, there were signs that manufacturing was starting to feel the brunt of a sharp United States economic slowdown, Mr. Waldman said.

“The most likely near-term course for the U.S. manufacturing sector is positive but slowing growth,” he said in a statement responding to the Fed report. “However, with the U.S. economy at a near standstill and world growth slowing quickly, a dimmer outlook for U.S. factories cannot be ruled out.”

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