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U.S. consumer prices fall
August 16, 2001: 9:50 a.m. ET

July CPI posts biggest drop in 15 years as inflation risk remains low
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NEW YORK (CNNfn) - Consumer prices in the United States posted their biggest decline in 15 years in July, led by plunging energy prices, the government said Thursday, indicating the risk of inflation remains low in the sluggish U.S. economy.

The Consumer Price Index (CPI), the government's main inflation gauge, fell 0.3 percent in July, its first decline since April 2000 and biggest since April 1986, the Labor Department reported, after increasing 0.2 percent in June. Analysts polled by expected a 0.1 percent decline.

Excluding often-volatile food and energy prices, the "core" CPI rose 0.2 percent after increasing 0.3 percent in June. Analysts had expected a 0.2 percent rise.

"The inflation numbers are really good," said Gary Thayer, chief economist at A.G. Edwards & Sons. "It's a very encouraging sign that consumers will be able to stretch their incomes a little bit further, and that bodes well for the economy going forward."

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graphicCNN's Tim O'Brien reports on the decline in July's Consumer Price Index.
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Separately, ground-breaking for new homes was at a seasonally adjusted annual rate of 1.672 million units last month, a 2.8 percent increase from the June rate of 1.627 million, the Commerce Department reported. Economists surveyed by expected housing starts at a rate of 1.62 million.

And the Labor Department reported first-time claims for unemployment benefits fell for the fourth straight week to 380,000 from an upwardly revised 388,000 the prior week.

Despite all the good news, U.S. stocks opened lower, while U.S. Treasury bond prices were little changed.

Click here for more on the Fed and rates

The data come just before the Federal Reserve meets Tuesday to discuss monetary policy. The Fed has cut its target for short-term interest rates six times this year in an effort to keep money flowing through the economy and avoid a recession. The risk of inflation could discourage the Fed from an aggressive monetary policy, but so far inflation has been tame.

"This is kind of number that will let the Fed relax and keep cutting rates as long as they see a need," Bill Cheney, chief economist at John Hancock Financial Services, told CNNfn's Before Hours program.

A 5.6 percent plunge in energy prices, the largest since April 1986, accounted for much of the good inflation news for July, coming on the heels of a 0.9-percent decline in June.

Gasoline prices plummeted by 11 percent in July, also the biggest one-month drop since April 1986. Nationwide average prices at the pump have tumbled since peaking on May 18 at $1.76 a gallon as refiners rushed to fill shortages that developed during the spring.

Natural gas prices, which posted a record decline in June, fell 4.1 percent in July. Home-heating oil went down by 2.8 percent.

After soaring by a record 3.8 percent in June, electricity prices rose just 0.6 percent in July. That comes as residents of California cope with a power crisis caused by shortage of electrical generating capacity.

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Consumer spending makes up two-thirds of the U.S. economy and has held strong, helping the nation avoid a recession, despite a year-long economic slowdown that has seen companies curtail spending and cut hundreds of thousands of jobs. Thursday's reports of low prices, a strong housing market and a labor market apparently on the mend could encourage that trend to continue.

"Rising jobless claims were [one] early sign the economy was slowing, and we think they may now represent an early sign that it will soon pick up speed again," said Ian Shepherdson, chief economist with High Frequency Economics Ltd.

Though housing starts were strong in July, permits to start construction declined 1.8 percent to a seasonally adjusted annual rate of 1.558 million, down from 1.587 million in July. It was the lowest rate for permits since December 2000, though permits were still up 1.6 percent from a year ago.

Thanks in large part to low mortgage rates, the housing market has been one of the few bright spots in the U.S. economy during the slowdown.

"Although housing should slow modestly over the balance of the year, it is unlikely to generate the major weakness typically associated with housing during an economic downturn," said Steven Wood, economist with FinancialOxygen. graphic

- from staff and wire reports


Special report: Eyes on the Fed

U.S. jobless claims move lower - Aug. 16, 2001

NAR study shows existing home prices rise in 2Q - Aug. 13, 2001

Fed's 'beige book' report: U.S. economy still slow - Aug. 8, 2001

U.S. CPI up more than expected in June - July 18, 2001

Fed cuts interest rates a quarter point; sixth cut in 2001 - June 27, 2001


CPI report

Housing starts report

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