WASHINGTON – Consumer prices shot up in July, reflecting sharply higher prices for gasoline and other energy products. But new car prices fell by the biggest amount in 30 years, helping to keep underlying inflation pressures tame.
The Labor Department (search) reported Tuesday that its closely watched Consumer Price Index (search) rose 0.5 percent in July, the biggest rise in three months. In July, overall inflation was driven higher by a big 3.8 percent jump in energy costs.
However, outside of food and energy, prices remained well behaved. The core inflation rate (search) edged up by just 0.1 in July. This price category, which is closely watched by the Federal Reserve (search), was helped in July by a 1 percent drop in new car prices, the biggest decline since January 1975.
In another report, the Commerce Department (search) said construction starts of new homes and apartments fell a slight 0.1 percent in July, a possible sign that the red-hot housing market is beginning to cool off.
The decline left housing construction at a seasonally adjusted annual rate of 2.042 million units last month.
So far this year, inflation is rising at a moderate annual rate of 3.5 percent as the explosion in energy costs has not yet triggered underlying inflation pressures. The core rate of inflation, excluding food and energy, is rising at an annual rate of just 2.2 percent so far this year.
But the soaring costs of fuel could have an adverse impact on the economy ultimately if consumers pressed by this higher expense cut back on their spending elsewhere.
The overall moderation in inflation pressures has allowed the Federal Reserve to keep pushing interest rates up gradually rather than being forced to switch to a more aggressive credit tightening. The Fed increased a key interest rate last week for a 10th time over the past 14 months. Economists expect more interest rate increases to follow.
For July, energy costs shot up by 3.8 percent, with gasoline prices rising by 6.1 percent as the pain motorists have been feeling at the pump was mirrored in government statistics.
Energy costs had fallen in May and June after rising sharply in the previous three months. However, the May and June price declines were reversed in recent weeks as global oil prices shot up to new record highs.
Analysts said motorists can expect more price jumps to come as gasoline pump prices have continued to rise in August.
The Energy Department (search) reported Monday that gasoline prices have now risen to $2.55 per gallon nationwide, 67.5 cents above the level of a year ago.
Food costs were up a moderate 0.2 percent in July even though the cost of fruits jumped by 2.8 percent.
The 0.1 percent rise in prices outside of food and energy marked the third straight monthly increase of just 0.1 percent.
The moderation in the core inflation rate in July was helped by a huge 1 percent decline in new car prices, reflecting the attractive discounting automakers provided last month to help clear out a backlog of unsold cars.