Cost of Living Gets Costlier
Inflation Running High as Fed Considers What to Do Next

By Nell Henderson
Washington Post Staff Writer
Thursday, August 17, 2006

After poring over reams of data, the Labor Department reported yesterday that inflation rose last month, eating into people's paychecks and savings at a quickening clip.

Emerging from the Georgetown University bookstore in a rush, Linda Dodd didn't need a government report to tell her that. "I just spent $85 and $90 on two books," she said with a shrug.

Textbooks, whose prices have risen at a brisk 6.2 percent pace in the past year, are among the many goods and services that are becoming more expensive as inflation persists at some of the highest levels in 15 years. Despite efforts by the Federal Reserve to bring the increases under control, consumer prices rose twice as fast in July as in the month before. So far this year, inflation is running at an annual rate of 4.8 percent, higher than any yearly increase since 1991.

Fruits and vegetables are up 3.7 percent for the year ending in July. Airfares are up. Hospital bills rose. Hotel room rates are rising. Rents are up.

When the Federal Reserve suspended its series of interest rate increases last week after two years of steady increases, many consumers and investors hoped that was a signal that inflation would soon retreat. Central bank policymakers indicated then that they hope the same thing, but they are not sure.

The economy and Fed policy are "at something of a crossroads," Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said yesterday, in the first public comments by a central bank policymaker since the Federal Open Market Committee met last week.

The economy is slowing, in large part because of past interest rate increases, and should continue to lose steam over the next year as those increases gradually work their way through, Fisher said. He and his colleagues want to slow the economy enough to weaken inflation without pitching the nation into recession.

But they do not know if more interest rate increases will be needed to finish the job, Fisher indicated. He said observers who say the Fed is done "are only guessing."

The data yesterday provided reasons for concern about inflation -- and hope that it may be headed lower in the months ahead, economists said.

The Labor Department's consumer price index, a widely followed inflation gauge, rose 0.4 percent in July, double its 0.2 percent increase the month before. The index rose 4.1 percent in the 12 months ended in July, compared with a 3.4 percent increase for all of last year.

Much of the inflation pick-up last month reflected a 2.9 percent jump in energy prices. Crude oil prices spiked to $77.03 a barrel July 14, and gasoline pump prices exceeded $3 a gallon across much of the country. Those prices have been falling back in recent days.

Prices rose for many other items, however, suggesting to economists that inflation is being fanned by more than energy costs. The "core" consumer price index, which excludes volatile food and energy prices, rose 0.2 percent in July and was up 2.7 percent for the 12 months ended in July, the highest yearly increase since late 1991.

Still, the July increase in core inflation was milder than many financial analysts and traders had expected after four consecutive months of 0.3 percent increases, and it boosted confidence in the Fed's forecast that inflation would eventually abate.

Stocks and bonds rallied yesterday on expectations that the core inflation figure, combined with other reports showing the economy slowing, will help persuade the Fed not to raise interest rates further.

A Fed report released yesterday showed that the nation's industrial production -- the output of its factories, mines and utilities -- rose more slowly in July than in June. The Commerce Department said yesterday that construction of new homes and permits for new construction declined last month, adding to other signs of a cooling housing market.

But Fed policymakers also said last week that "some inflation risks remain," citing high prices for energy and raw materials, tightening labor markets, and other constraints on businesses' ability to produce goods and services. Businesses' usage of their production capacity, for example, rose to 82.4 percent from 82.3 percent, the Fed report said yesterday.

With unemployment low and wages rising, "we see it a bit too soon to celebrate the demise of inflation," said Stuart G. Hoffman, chief economist at PNC Financial Services Group. Wages have risen, but more slowly than prices, the Labor Department said in another report yesterday. Average weekly earnings fell 0.1 percent last month and bought 0.1 percent less in July than a year earlier, after adjusting for inflation, the department said.

Education expenses account for a small portion of the consumer price index, but they loom large in the budgets of many students and their families this time of the year and help illustrate how broadly inflation pressures are being felt.

Education bills, including tuition, books and school supplies, rose 0.6 percent last month, as many students and their families started preparing for the coming academic year. And they were 5.9 percent higher in July than a year before, rising faster than overall inflation.

"The books are very expensive," said Dodd, 30, of Arlington. So are tuition, room and board, she said.

One bright spot for students and other consumers has been falling prices for personal computers and related equipment, which dropped 0.9 percent in July. Prices also fell by a record 7.3 percent last month for women's and girls' clothing, even after adjusting for seasonal variation, the Labor Department said

On campus, "a lot of people are living on loans to pay their bills," Dodd said of her Georgetown classmates. "I think it's hard if you don't have the backing of your family."

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