Fri Jul 16, 2004
By Glenn Somerville

WASHINGTON, July 16 (Reuters) - The pace of U.S. consumer price increases moderated in June, the government said on Friday, which proved a relief for financial markets fearful about the extent of inflation.

The Labor Department's Consumer Price Index, the most widely used gauge of inflation, rose 0.3 percent -- half the 0.6 percent jump posted in May when gasoline prices were soaring but slightly ahead of Wall Street economists' forecasts for a 0.2 percent rise.

So-called core CPI, which strips out volatile food and energy costs, edged up a smaller-than-expected 0.1 percent in June following a 0.2 percent May increase. Over the past 12 months, core inflation has risen 1.9 percent.

Analysts said the report presented a mixed picture of inflation prospects, which have raised some concern among Federal Reserve Board members. Fed Governor Susan Bies said in a Chicago speech on Thursday the Fed needed to "be alert" to potential inflationary pressures.

"The debate on the direction of inflation is not over," said economist Alan Gayle of Trusco Capital Management in Atlanta after the CPI report, adding that while broad price pressures had yet to emerge, he does not believe "the worst is over."

Bond prices surged, with the 30-year U.S. Treasury bond ahead nearly a full point, and the dollar fell against the euro after the CPI data. Market participants focused on the moderate rise in the core rate, which traders wagered meant the U.S. central bank will stick with moderate rate increases ahead.

Stock prices were also higher, with the Dow Jones industrial average up about 20 points at mid-morning, on hopes the CPI data pointed to well-controlled price rises.

At mid-morning, it was reported that the University of Michigan's consumer sentiment index rose slightly to 96.0 in July from a final reading of 95.6 for June. Analysts said the modest rise was a comforting indicator that consumers were not growing dispirited as some had speculated might be happening after retail sales weakened in June.

The U.S. central bank raised its benchmark federal funds rate a quarter percentage point on June 30 to keep prices in check and the economy growing at a healthy, sustainable pace.

Further incremental borrowing cost rises are anticipated later this year as policy-makers gradually move rates to what they have called a more "neutral" level after cutting them 13 times since 2001 to stimulate a slow recovery from recession.

Energy costs remained the key factor behind higher consumer prices in June. The Labor Department said energy accounted for about two-thirds of the overall rise in the broad index. Gasoline, natural gas, fuel oil and electricity costs all were higher than in May.

Economist Rich Yamarone of Argus Research Corp. in New York said it was evident that some of the price pressures were "cost-push," originating with commodities like oil and lumber, rather than harder-to-control "demand-pull" increases that generally reflect rising wage costs.

"What that is saying, and the Fed itself is saying, is that this is transitory, cost-push inflation that is commodity-specific and those types of increases have historically been temporary or short-lived," Yamarone said.

Similarly, economist Ken Mayland of ClearView Economics in Pepper Pike, Ohio, said it seemed some price increases that were so evident in April and May already were easing.

"If we think ahead a little bit, gasoline prices have come down, so we can anticipate a sizable negative in the July headline CPI," Mayland added. "We're not talking zero inflation here, so there is not a case for the Fed to stand pat and not do anything. But the Fed is going to move in the 'measured' pace of 25 basis point increases."

Energy costs rose 2.6 percent after an even larger 4.6 percent surge in May. Over the 12 months ending in June, energy costs have risen a steep 17 percent.

On Thursday, the department reported that producer prices unexpectedly eased 0.3 percent in June.

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