U.S. consumer prices excluding food and energy rose last month by the most since August 2002, reflecting higher costs for public transportation, medical care and housing.
The core consumer price index rose 0.3 percent, three times as fast as economists had forecast, after holding steady in each of the previous two months. The Labor Department in Washington said the overall index was unchanged in May, tempered by a drop in energy prices, after falling 0.3 percent.
The larger-than-expected rise in the core rate may allay concerns among some economists and Federal Reserve policy makers that a broad-based fall in prices, or deflation, has started to take root, posing an immediate threat to the economy. With interest rates low, demand may strengthen and help prevent a sustained drop in prices, economists said.
The CPI report is ``certainly encouraging with regards to concerns over deflation,'' said Geoffrey Somes, a senior economist at Fleet Bank in Boston. ``A negative number would have reinforced fears of deflation. I don't think deflation is a significant risk right now anyway, and this reinforces my belief.''
U.S. Treasuries fell in New York after the report eased deflation concerns. The Treasury's benchmark 3 5/8 percent note maturing in May 2013 fell more than 3/8 point, pushing the yield up 5 basis points to 3.22 percent at 8:53 a.m. A basis point is 0.01 percentage point.
A separate report from the Fed showed industrial production up 0.1 percent in May, the first rise in three months, after a 0.6 percent decrease. Manufacturing output increased 0.2 percent during the month.
Year-to-Year Rise
Economists had expected a 0.1 percent decrease in the consumer price index, based on the median of 63 forecasts in a Bloomberg News survey. Core prices were forecast to rise 0.1 percent.
The price of all goods and services is up 2.1 percent for the year ended last month compared with a 2.2 percent increase in 12 months ended in April. Core prices are up 1.6 percent over the last 12 months compared with a 1.5 percent increase in the year ended in April.
Fed policy makers have cautioned that a further slowdown in inflation is not desirable and price increases have slowed this year. Central bankers are still forecast to lower interest rates next week to forestall an onset of deflation, economists said.
So far this year, consumer prices are rising at a 2.3 percent annual rate compared with a 3 percent increase at the same time last year. Core prices are rising at a 1.1 percent annual pace, down from a 2.1 percent rate in the first five months of 2002.
Fed policy makers meet next week and are expected to lower the benchmark interest rate target to spur the economy. Economists are forecasting a quarter percentage point reduction in the target rate following the end of the two-day meeting on June 25, according to the median estimate in a separate Bloomberg News survey. The rate is currently at 1.25 percent, the lowest since 1961.
`Corrosive'
Fed Chairman Alan Greenspan said this month that central bankers are concerned about ``corrosive deflation,'' a general decline in prices that feeds on itself. While there's a ``very low probability'' of deflation emerging in the U.S., the Fed's lack of experience in dealing with the phenomenon means ``we need a wider firebreak,'' Greenspan said.
That suggests the Fed ``would be far more inclined, as we have had over the last couple of years, to be taking out insurance against economic weakness,'' he said.
Service prices rose 0.5 percent last month and are up 3.4 percent over the last year.
The cost of medical care rose 0.4 percent last month after a 0.2 percent increase in April. Housing costs, which include some energy costs and account for one-third of the index, rose 0.4 percent in May after falling 0.1 percent. A category designed to track shelter prices rose 0.6 percent, the biggest rise since January 1991. The cost of hotel stays surged 4.1 percent in May, the largest on record.
Public Transportation
The costs of bus, subway and other public transportation surged 7.3 percent in May, the biggest increase since July 1981, and reflects increase in New York-area transit fares, the Labor Department said. Airfares rose 1 percent last month.
The lessening of hostilities in Iraq caused oil prices to drop beginning in April. The decline was still filtering down to consumer prices last month.
The lessening of hostilities in Iraq caused oil prices to drop starting in April. The decline was still filtering down to consumer prices last month.
Energy prices, which account for about a 14th of the index, fell 3.1 percent in May after falling 4.6 percent the prior month. Gasoline prices fell 6.8 percent.
Fuel costs aren't the only prices that are retreating. The cost of all goods including cars, apparel and food fell 0.7 percent last month and are 0.3 higher in the last year. New car prices fell 0.1 percent last month after falling 0.4 percent in April and are down 1.2 percent in the last 12 months.
Auto Incentives
Detroit-based General Motors Corp. increased average incentives to a record $3,916 per vehicle last month to keep sales from flagging. Ford Motor Co. offered $3,624 per vehicle and DaimlerChrysler's Chrysler unit provided $3,511, according to industry data. All three automakers extended incentives into July.
The reason is slow economic growth. Most economists say the economy can grow between 3 percent and 4 percent without risking a pickup in inflation. Growth hasn't exceeded 3 percent at an annual pace for consecutive quarters since the last six months of 1999.
``We are not going to let our competitive position erode because of others ability to price beneath us,'' said Carly Fiorina, chief executive at Hewlett-Packard Co., the world's No. 2 computer maker, during a meeting with analysts this month.
Hewlett-Packard
Palo Alto, California-based Hewlett-Packard on the same day said it would meet analysts' second-half sales and profit estimates by taking market share from rivals, increasing worker productivity and cutting costs.
Food prices, which account for about a fifth of the index, rose 0.3 percent in May after decreasing 0.1 percent the month before.
The CPI is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets. Goods, including food, clothing, autos and appliances, make up the rest.
The core consumer price index rose 0.3 percent, three times as fast as economists had forecast, after holding steady in each of the previous two months. The Labor Department in Washington said the overall index was unchanged in May, tempered by a drop in energy prices, after falling 0.3 percent.
The larger-than-expected rise in the core rate may allay concerns among some economists and Federal Reserve policy makers that a broad-based fall in prices, or deflation, has started to take root, posing an immediate threat to the economy. With interest rates low, demand may strengthen and help prevent a sustained drop in prices, economists said.
The CPI report is ``certainly encouraging with regards to concerns over deflation,'' said Geoffrey Somes, a senior economist at Fleet Bank in Boston. ``A negative number would have reinforced fears of deflation. I don't think deflation is a significant risk right now anyway, and this reinforces my belief.''
U.S. Treasuries fell in New York after the report eased deflation concerns. The Treasury's benchmark 3 5/8 percent note maturing in May 2013 fell more than 3/8 point, pushing the yield up 5 basis points to 3.22 percent at 8:53 a.m. A basis point is 0.01 percentage point.
A separate report from the Fed showed industrial production up 0.1 percent in May, the first rise in three months, after a 0.6 percent decrease. Manufacturing output increased 0.2 percent during the month.
Year-to-Year Rise
Economists had expected a 0.1 percent decrease in the consumer price index, based on the median of 63 forecasts in a Bloomberg News survey. Core prices were forecast to rise 0.1 percent.
The price of all goods and services is up 2.1 percent for the year ended last month compared with a 2.2 percent increase in 12 months ended in April. Core prices are up 1.6 percent over the last 12 months compared with a 1.5 percent increase in the year ended in April.
Fed policy makers have cautioned that a further slowdown in inflation is not desirable and price increases have slowed this year. Central bankers are still forecast to lower interest rates next week to forestall an onset of deflation, economists said.
So far this year, consumer prices are rising at a 2.3 percent annual rate compared with a 3 percent increase at the same time last year. Core prices are rising at a 1.1 percent annual pace, down from a 2.1 percent rate in the first five months of 2002.
Fed policy makers meet next week and are expected to lower the benchmark interest rate target to spur the economy. Economists are forecasting a quarter percentage point reduction in the target rate following the end of the two-day meeting on June 25, according to the median estimate in a separate Bloomberg News survey. The rate is currently at 1.25 percent, the lowest since 1961.
`Corrosive'
Fed Chairman Alan Greenspan said this month that central bankers are concerned about ``corrosive deflation,'' a general decline in prices that feeds on itself. While there's a ``very low probability'' of deflation emerging in the U.S., the Fed's lack of experience in dealing with the phenomenon means ``we need a wider firebreak,'' Greenspan said.
That suggests the Fed ``would be far more inclined, as we have had over the last couple of years, to be taking out insurance against economic weakness,'' he said.
Service prices rose 0.5 percent last month and are up 3.4 percent over the last year.
The cost of medical care rose 0.4 percent last month after a 0.2 percent increase in April. Housing costs, which include some energy costs and account for one-third of the index, rose 0.4 percent in May after falling 0.1 percent. A category designed to track shelter prices rose 0.6 percent, the biggest rise since January 1991. The cost of hotel stays surged 4.1 percent in May, the largest on record.
Public Transportation
The costs of bus, subway and other public transportation surged 7.3 percent in May, the biggest increase since July 1981, and reflects increase in New York-area transit fares, the Labor Department said. Airfares rose 1 percent last month.
The lessening of hostilities in Iraq caused oil prices to drop beginning in April. The decline was still filtering down to consumer prices last month.
The lessening of hostilities in Iraq caused oil prices to drop starting in April. The decline was still filtering down to consumer prices last month.
Energy prices, which account for about a 14th of the index, fell 3.1 percent in May after falling 4.6 percent the prior month. Gasoline prices fell 6.8 percent.
Fuel costs aren't the only prices that are retreating. The cost of all goods including cars, apparel and food fell 0.7 percent last month and are 0.3 higher in the last year. New car prices fell 0.1 percent last month after falling 0.4 percent in April and are down 1.2 percent in the last 12 months.
Auto Incentives
Detroit-based General Motors Corp. increased average incentives to a record $3,916 per vehicle last month to keep sales from flagging. Ford Motor Co. offered $3,624 per vehicle and DaimlerChrysler's Chrysler unit provided $3,511, according to industry data. All three automakers extended incentives into July.
The reason is slow economic growth. Most economists say the economy can grow between 3 percent and 4 percent without risking a pickup in inflation. Growth hasn't exceeded 3 percent at an annual pace for consecutive quarters since the last six months of 1999.
``We are not going to let our competitive position erode because of others ability to price beneath us,'' said Carly Fiorina, chief executive at Hewlett-Packard Co., the world's No. 2 computer maker, during a meeting with analysts this month.
Hewlett-Packard
Palo Alto, California-based Hewlett-Packard on the same day said it would meet analysts' second-half sales and profit estimates by taking market share from rivals, increasing worker productivity and cutting costs.
Food prices, which account for about a fifth of the index, rose 0.3 percent in May after decreasing 0.1 percent the month before.
The CPI is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets. Goods, including food, clothing, autos and appliances, make up the rest.
3287.99
1275.09