Inflation Climbs to 17-Year High

By Zachary A. Goldfarb and Ylan Q. Mui
Washington Post Staff Writers
Friday, August 15, 2008

Americans paid more last month not only for gas and food but also for a variety of goods and services, including clothes, shoes, hotels and air travel, as inflation unexpectedly jumped to a 17-year high.

The consumer price index climbed 0.8 percent in July, the Labor Department said yesterday, twice as much as Wall Street anticipated. It was the third straight month of high inflation, and the 5.6 percent year-over-year change was the highest since January 1991, when the economy was in recession.

The government data showed that companies, which have been struggling all year with fast-rising prices for oil and other raw materials they need to manufacture and transport their goods, are increasingly passing the higher costs on to consumers.

"There appears to be a shift in the willingness of firms to raise prices," said Dean Maki, chief economist with Barclays Capital. "Costs are rising so rapidly that many businesses have no choice but to pass along price increases."

J.M. Smucker has raised prices on jams and other cooking supplies. Procter & Gamble has increased the cost of detergent, pet food and razors.

But the inflation report did not spook the market. The Dow Jones industrial average rose 82.97 points, or 0.72 percent, closing at 11,615.93. Other stock indicators were also up.

Economists said the inflation data were unlikely to change attitudes at the Federal Reserve, which has expected oil and food inflation to spill over into other goods. "With gasoline and other consumer energy prices rising in recent weeks," Fed Chairman Ben S. Bernanke said in July congressional testimony, "inflation seems likely to move temporarily higher in the near term."

"Core" inflation, excluding energy and food, increased 0.3 percent from last month and 2.5 percent from the year before. The Fed has an unofficial target rate for annual inflation of about 2 percent, but it has resisted raising rates to curb inflation because of broader concerns about the U.S. economy.

The Fed might also take comfort in the fact that oil and food prices have eased this month, developments that were not factored into the July report.

Overall, the consumer price index was driven higher by rising prices for gasoline (4.1 percent), natural gas (7.4 percent), electricity (2.5 percent) and other household fuels. Food prices increased 0.9 percent.

Economists were particularly alarmed by price spikes in other areas. Apparel jumped 1.2 percent. Lodging away from home climbed 0.7 percent. Education, telephone services, tobacco and airfare also rose substantially.

In the case of apparel, economists said there were growing signs that import prices are rising fast -- especially from places such as China. "Retailers are saying that China is getting too costly and they have to shift their operations out of China," said Richard Yamarone, chief economist at Argus Research. "Wages are escalating there, and shipping prices are out of control."

Indications from Wal-Mart, the largest U.S. retailer, suggest that Americans are turning more to discounted food and medicine. Wal-Mart is using its global purchasing power to contain costs while curbing other expenses.

"Wal-Mart's customer is reflective of society in general. While some of them live paycheck-to-paycheck, our customers represent a broad income segment, and they are all challenged today," chief executive H. Lee Scott Jr. said in a conference call with analysts yesterday. "When energy and oil prices go up on top of inflation in health-care and core food items, there's a great deal of pressure on the customer."

Last week, Wal-Mart said it was beginning to see sharper spikes in sales after pay cycles, which suggests more people need every penny they earn to afford basic goods.

"This is my new home," said Tawanda Felder of District Heights, standing outside the Wal-Mart in Landover Hills. Felder, who was laid off seven months ago and hasn't found a job since, said she is able to fill prescriptions at $10 per month that would cost $35 elsewhere. "The prices are significantly different."

Wal-Mart reported yesterday that second-quarter profit rose 17 percent, to $3.45 billion. The world's largest retailer rang up $101.6 billion in sales, a 10.4 percent increase from last year. The company raised its annual earnings forecast.

Other government reports made clear yesterday that rising prices and a slowing economy are making life difficult for many.

Americans' buying power eroded in July, the government said yesterday. Average weekly earnings slipped 3.1 percent in July compared with the year-ago figure, in the biggest decline since November 1990.

The government also said the number of people receiving unemployment benefits for more than a week jumped by 114,000, to 3.4 million, a sign people are spending more time on unemployment rolls.

"A lot of people are beginning to adapt to higher prices [for] food and energy, as much as they don't like it," said Terry Sheehan, an economic analyst with Stone & McCarthy Research Associates. "Their long-term worry is: Are they going to keep their job?"

In recent weeks, oil prices have come down about 20 percent from their highs, which should show up in upcoming inflation reports. "I don't want to say that was inflation's final hurrah, but the inflation storm may just have passed," said Stuart G. Hoffman, chief economist with PNC Financial Services Group.

In other economic news, median home prices declined in more than 75 percent of U.S. cities during the second quarter. But home sales rose in places where the market was already filled with foreclosures.

Staff writers Neil Irwin and Alejandro Lazo contributed to this report.

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