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Inflation in check; what's next?
CPI unchanged in June, core-CPI up only 0.1 percent; both inflation measures trail forecasts.
July 14, 2005: 10:45 AM EDT
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NEW YORK (CNN/Money) - Prices paid by consumers were less than expected by Wall Street, according to a government report Thursday that showed inflationary pressures in check.

The Consumer Price Index, the broad measure of retail prices, showed no change, compared to a 0.1 percent decline in May. The overall measure was helped by lower energy prices.

Economists surveyed by had forecast a 0.3 percent rise in the overall price reading.

The so-called core-CPI, which excludes often volatile food and energy prices, was up 0.1 percent, the same increase posted in May. Economists were expecting a 0.2 percent rise in the closely watched core number.

Energy prices fell 0.5 percent in June, according to the report, following a 2 percent decline in May. That decline is likely to be temporary, though, as the average price of a gallon of unleaded gas hit a record $2.33 in a separate government report Monday.

But the core CPI has shown increases of only 0.1 percent each of the past two months, after being unchanged in April, showing that the underlying inflationary pressures appear well contained even if energy prices show increases.

"We're not likely to see reports as good as this the second half of the year. We know gasoline prices picked back up in July. But inflation should stay in basically in check," said Mark Vitner, senior economist with Wachovia Securities.

Over the past 12 months overall retail prices are up 2.5 percent, while core-CPI is up 2 percent in the same period. But over the past three months, inflationary pressure has been even lower, with overall CPI up at an annual rate of 1.9 percent during that time, while the core rate was up at a 1.2 percent annual pace.

Tame reaction

Bond prices initially rallied as the yield on the 10-year Treasury, which moves in the opposite direction, fell following the report. Tame inflation takes pressure off the Federal Reserve to continue to raise interest rates. The Fed uses higher rates to slow the economy and keep prices stable.

But an hour after the report, prices and yields had returned to levels just before the morning release.

University of Maryland professor Peter Morici said that even though inflation is contained, he would be surprised if the Fed pauses in its path of quarter-percentage point rate hikes until after its Nov. 1 meeting. That argues for three more increases.

"Federal Reserve Chairman Greenspan is intent on raising the Federal Funds rate to a level that again makes monetary policy a credible tool in the event of a sharp downturn in the economy," he said. "That requires a Federal Funds rate of at least 3.5 percent, and in Greenspan's mind, at least 4 percent. "

The Fed Funds rate is now at 3.25 following nine straight quarter-point hikes starting last June.

Stocks futures moved higher on the CPI report and a separate Commerce Department reading that showed stronger than expected retail sales, and major indexes were higher at the open.

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