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Higher prices blamed on fuel

Economists wary of falling costs

Christina Bunker shopped for raspberries yesterday in New York. Consumer prices shot up in June by the largest amount in 11 months, the Labor Department said yesterday. Christina Bunker shopped for raspberries yesterday in New York. Consumer prices shot up in June by the largest amount in 11 months, the Labor Department said yesterday. (Mark Lennihan/ Associated Press)
By Martin Crutsinger
Associated Press / July 16, 2009
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WASHINGTON - Sharply higher prices for everyday goods in June reflected a surge at the gas pump, not the start of a dangerous bout of inflation. In fact, economists say falling prices are the bigger danger.

A Labor Department report yesterday showed consumer prices making their biggest jump last month in almost a year. But overall prices are down 1.4 percent from this time last year - the biggest decline in almost six decades.

That’s bad news for business executives. High unemployment and stagnant wages mean they risk losing customers if they raise their prices.

After sales rose for three months at Mitchell & Best Homebuilders of Rockville, Md., vice CEO Marty Mitchell thought the time was right to try hiking prices at one of his eight developments.

But so far the 2 percent bump has been a failure - a disappointment for the company because “we’re actually selling for less than the true cost,’’ Mitchell said.

Consumer prices were up 0.7 percent in June, the Labor Department said, mostly because of higher energy prices. Gasoline was 17 percent more expensive in June than in May.

Food prices were up only slightly, and dairy products were cheaper. Core inflation, which excludes food and energy, posted a moderate 0.2 percent rise in June, well within the Federal Reserve’s comfort zone.

“You are not going to get serious domestic inflationary problems until you get closer to full employment, and that is going to take at least five years,’’ said David Wyss, chief economist at Standard & Poor’s in New York.

The Fed delivered a similar message yesterday, forecasting that unemployment would top 10 percent this year and saying it expects inflation will “remain subdued for some time.’’

Economists say there are two threats that could scuttle their forecast of benign inflation - oil and the dollar. If Middle East tensions suddenly sent oil prices surging, or if the dollar started falling precipitously, all bets would be off.

The jump in consumer prices in June did stir some inflationary concerns on Wall Street, sending bond prices lower for a third straight day. But stocks surged for the second time in three days, propelling all the major indexes up about 3 percent and the Dow Jones industrials up 257 points for their biggest one-day gain in nearly four months. An upbeat forecast from Intel Corp. and the Federal Reserve’s more positive take on the economy built on momentum that began Monday when an analyst issued an optimistic forecast for Goldman Sachs Group Inc.

The Fed said the decline in factory output last month was slower than in May, a possible sign the recession is easing. Factories are running well below capacity, and idle machinery is further evidence to economists that the risk of inflation is low.

Among other signs in the economy that inflation is in check:

  • Prices for personal computers and electronic gadgets have dropped, or stayed steady with added features. Even Apple Inc., known for its premium products, recently cut the price of the cheapest iPhone in half and took $300 off some laptops.

  • Drug companies did raise prices slightly on some medications with few signification rivals, but prices for most prescription drugs should stay flat or drop, predicted analyst Steve Brozak of WBB Securities.

  • Airlines are unlikely to raise fares anytime soon. Demand, especially among business travelers, remains soft and is expected to stay that way. Low-fare specialist Southwest cut fares ahead of the traditionally slower fall travel season.