Consumer Prices, Industrial Output Data Shows Glass-Half-Full Economy

Falling gasoline costs held U.S. consumer prices nearly in check in July, while industrial output rose in a sign of factory sector health, according to data that suggested the economy was sound despite credit fears in financial markets.

Other reports on Wednesday showed a slight dip in New York state manufacturing activity this month and a decline in the amount of capital flowing into the United States in June.

But analysts said the latest data, combined with reports earlier this week showing strong retail sales and a shrinking trade deficit, pointed to an economy that is actually doing pretty well.

"Things don't look that bad. There is no evidence yet in the data that the economy is on the cusp of losing steam," said Michael Darda, chief economist at MKM Partners in Greenwich, Conn.

The Consumer Price Index, a key inflation gauge, rose a slightly smaller-than-expected 0.1 percent as gasoline prices fell 1.7 percent, the Labor Department said. Economists polled by Reuters had expected a rise of 0.2 percent.

Darda said even with the latest volatility in the financial markets amid fears of a liquidity shortage, the Federal Reserve is not likely to cut interest rates.

"What's happened with the financial market turbulence is it takes the Fed out of the picture for the foreseeable picture. I think the Fed is going to be very disciplined," Darda said.


Core inflation, which excludes volatile food and energy prices, rose 0.2 percent in July, matching forecasts. Year-over-year, the core CPI held steady at 2.2 percent for a third straight month.

The Fed said last week that inflation remained its predominant concern, although it acknowledged that a wobbly housing market had led to tightening credit terms for some households and businesses.

"The July CPI readings don't make it any harder or easier for the Fed to cut interest rates," said Richard Huber, economist at A.G. Edwards and Sons in St. Louis. "The trade deficit data we got yesterday will drive GDP numbers for the second quarter higher, which will allow the Fed to say that it's still focused on inflation."

U.S. stocks were teetering between gains and losses on Wednesday amid worries over signs of worsening credit conditions, while U.S. Treasury bond prices were mixed.


Meanwhile, industrial output rose by an expected 0.3 percent in July as automotive-related production surged 2.6 percent during the month, offsetting a big decline in utility output, a Federal Reserve report showed.

Excluding motor vehicles and parts, industrial output rose just 0.2 percent, but manufacturing output rose 0.6 percent.

"Low inventory levels, strong export demand, and ongoing moderate economic growth at home have allowed the manufacturing sector to shake off the depressing effects of the housing downturn," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

Separately, the U.S. Treasury said net overall capital inflows into the United States dropped to $58.8 billion in June from May's revised inflow of $107.3 billion, hurt by a plunge in net purchases of U.S. securities by private investors.

June's net overall capital inflow barely covered the U.S. trade deficit for the month of $58.1 billion.

In another report, the New York Federal Reserve said manufacturing activity in New York State factories slowed in August. The New York Fed's "Empire State" general business conditions index fell modestly to 25.06 from 26.46 in July.