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Consumer prices edge up
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August 16, 2000: 11:37 a.m. ET
Prices rise 0.2% in July; housing starts and building permits decline
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Inflation edged up only slightly in July while housing starts slowed somewhat, according to government reports released Wednesday -- reports that spurred investor expectations that the Federal Reserve will not raise short-term interest rates next week.
The closely watched consumer price index, a measure of inflation, rose 0.2 percent in July, according to a Department of Labor report. While that was above the 0.1 percent forecast by analysts, it is well below the 0.6 percent jump in June, which was driven by higher fuel prices.
 Perhaps more significant, the so-called core CPI, which excludes often-volatile food and energy prices, rose 0.2 percent in July, in line with forecasts and June's core CPI figure.
The CPI report is the last major economic report to be released before Tuesday's Fed meeting. Investors have been expecting the Fed to forgo raising interest rates at the meeting. Economists on Wednesday said the CPI report did little to change expectation that rates would go unchanged at the Fed meeting. The central bank left the fed fund rate at 6.5 percent at its last meeting in June.
"The market and economists like to expect the expected, and that's exactly what we got," Wayne Ayres, chief economist at FleetBoston, told CNNfn's Before Hours program Wednesday.
But there are enough signs of building inflationary pressures in the report that the Fed is likely to issue a statement next week warning of its concerns, David Orr, chief economist for First Union, said.
"The soap opera will continue," Orr said. "I wouldn't take them off stage altogether as some people are doing."
 Orr said a separate Department of Labor report Wednesday shows that even though inflation is low, it is slightly outpacing growth in earnings, causing a 0.3 percent decline in real earnings in July compared with year ago results.
"There are two implications there. One, wage demands will begin to pick up. And the second thing is that we'll see a continuing to the slowdown in consumer spending."
But while Orr sees the likelihood of some further rate hike at the end of the year or early next year, some economists say the Fed soon may start mulling an interest rate cut.
"Inflation hawks may be eating crow today," said Oscar Gonzalez, economist with John Hancock Financial Services. "Despite their fears of tight labor markets and a strong economy, inflation is only creeping, not accelerating. I don't think that this report assures that the Fed tightening cycle is over, but I wouldn't be surprised to see rising market expectations of a rate cut. With most prices in check and energy prices easing, this report is about as good as it gets."
Housing starts slow
In a separate report, housing starts came in at an annual rate of 1.512 million. That's the lowest level since November 1997 and below the forecast of analysts surveyed by Briefing.com, who predicted a 1.55 million annual rate. It also is below the revised 1.563 in June.
Building permits fell to an annual rate of 1.49 million in July from a 1.51 million rate in June.
 Housing starts are an important predictor of consumer purchasing, due to the need to furnish new houses with appliances and furniture.
"Mortgage rates have moved lower recently and housing could respond in coming months," Michael Moran, chief economist at Daiwa Securities, said. "But the latest information from this cyclical area shows some moderation."
Orr said the surprisingly low housing start number might unexpectedly be more important than the CPI figure.
"It does fit in with [Fed Chairman Alan] Greenspan's perception that we're past the peak of consumer spending binge," Orr said. "He doesn't want consumer spending to be slow, but he wanted it to back off from stratospheric levels."
The housing numbers are the latest sign that the economy is slowing but will be able to achieve a so-called "soft landing" rather than slipping into recession, Ayres said. (275KB WAV) (275KB AIFF)
Markets appeared little changed by the reports. U.S. stock markets opened mixed Wednesday while bonds edged lower. 
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