U.S. Consumer Prices Rose Slightly in July -- Update

U. S. inflation was subdued in July, held down in part by weakness in hotel rates, which perpetuates a soft trend that is puzzling Federal Reserve officials who expected an improving economy to be pushing consumer prices up at a faster rate.

The consumer-price index, which measures what Americans pay for everything from ice cream to doctor visits, increased 0.1% in July from the prior month, the Labor Department said Friday. Excluding the often-volatile categories of food and energy, so-called core prices also rose 0.1%. From a year earlier, overall consumer prices climbed 1.7%, as did core prices, below the Fed's 2% goal for inflation.

Five months of 0.1% growth or lower in core prices marks "a remarkable run in the context of an economy that is clocking above-trend growth and a labor market that has moved well into tight territory," said Stephen Stanley, chief economist at Amherst Pierpont.

The cost to consumers of lodging away from home, which includes hotels and housing at schools, fell 4.2% in July from a month earlier, the biggest one-month decline since records began in 1997. Over the past year, these prices have declined 2.4%.

Analysts say this could be an anomaly, and STR Inc. figures on hotel rates in the U.S. illustrate growth in the average price per room of more than 2% in the first half of 2017 from the same period a year earlier.

"Hotel room rates are notoriously volatile and, consequently, we would normally expect July's fall to be reversed in August," said Paul Ashworth, chief economist at Capital Economics, in a note to clients.

Other special factors held down prices earlier in the year, including a big drop in rate for cellular phone services.

Elsewhere, July saw gains in some areas that had been weak, including airline fares, apparel, physicians' services and prescription-drug prices. That might portend some pickup down the road, as Fed officials are expecting. Overall prices grew month-over-month for the first time since April.

Despite some upsides, overall prices have grown at a seasonally adjusted annual rate of 0.9%, while core prices have risen just 1.3% through the first seven months of this year. Though this isn't the Fed's preferred inflation measure, it nonetheless shows a weakened inflation outlook.

The Fed is expected to announce in September that it will begin to unwind a $4.5 trillion securities portfolio. The low inflation numbers aren't likely to derail that move, but if they persist the data could give the central bank pause when considering whether to raise its benchmark interest rate later this year.

The Fed is tasked with achieving maximum sustainable employment and stable prices. With unemployment at 4.3% in July, it appears the Fed has closed in on one half of its mandate. Inflation, however, has disappointed. Officials want inflation near 2%. They believe increases much beyond that number eat into the purchasing power of household paychecks and make it harder for business to plan while drops below 2% inflation signal anemic growth and risk of persistent recession.

"We've been sitting in the same range of around 1.5% to 2 %," said Tim Courtney, CIO of Exencial Wealth Advisors, a registered investment adviser. "What we're seeing is this reversion back to the markets we've been in since the middle part of 2014."

The Fed's preferred measure of inflation, the price index for personal-consumption expenditures, was unchanged in June from the prior month, the second straight flat reading. It was up 1.4% in June from a year earlier and has dropped for four consecutive months on an annual basis, from 2.2% in February. Though soft energy prices have played a role in weak inflation readings, it wasn't the only factor.

Core PCE prices came in at 1.5% from a year earlier, down from 1.9% in February.

The consumer-price index tends to run a little bit higher than the personal-consumption index, reflecting different methods for calculating inflation. Both gauges have followed the same pattern.

A separate Labor Department report showed average weekly earnings for private-sector workers, adjusted for inflation, increased 0.2% in July from the prior month. From a year earlier, inflation-adjusted weekly earnings were up 1.1%.

--Josh Mitchell contributed to this article.

Write to Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

August 11, 2017 17:56 ET (21:56 GMT)