By Shobhana Chandra
Aug. 14 (Bloomberg) -- U.S. consumer prices rose at the fastest pace in 17 years in July, limiting the ability of the Federal Reserve to lower interest rates as economic growth slows.
The cost of living climbed 5.6 percent in the year ended in July, the Labor Department said today in Washington. It was up 0.8 percent from the previous month, twice as much as anticipated. So-called core prices, which exclude food and energy, also advanced more than projected.
The surge last month reflected energy prices that have since declined, signaling July may represent the peak in inflation. Still, increases went beyond food and fuel, including gains in clothing, airline fares and education, likely intensifying discussions among Fed policy makers about how quickly to shift toward raising rates.
``What we are seeing is a lot of commodity-price spillover'' into other items, said Richard DeKaser, chief economist at National City Corp. in Cleveland, who correctly forecast the increase in core prices. ``Numbers like this increase the hand of hawks'' at the Fed who argue that rates need to rise to quell inflation, he said.
Commodity costs have retreated since mid-July. Crude oil futures dropped as low as $112 a barrel this week after topping $147 last month. Regular gasoline, which reached a record $4.11 a gallon on July 17, has fallen about 8 percent, according to AAA.
``We're probably looking in the rearview mirror with respect to the worst part of inflation,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``Energy prices have declined sharply in the last month.''
Treasuries rose, with benchmark 10-year note yields falling to 3.89 percent at 4:35 p.m. in New York, from 3.94 percent late yesterday. The Standard & Poor's 500 Stock Index advanced 0.6 percent to close at 1,292.93.
Separate reports today reinforced evidence of a weakening job market and continued slump in housing.
The Labor Department reported that 450,000 Americans, more than anticipated, filed first-time claims for jobless benefits last week. Claims averaged 321,400 last year.
The median price for a single-family home in the U.S. dropped 7.6 percent in the second quarter as bank sales of foreclosed homes caused values to tumble in three-quarters of U.S. cities, the National Association of Realtors said.
Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace, a 10-year low, the realtors group also said.
Consumer prices were forecast to rise 0.4 percent, according to the median estimate of 78 economists in a Bloomberg News survey. Projections ranged from gains of 0.1 percent to 0.7 percent.
Costs excluding food and energy increased 0.3 percent for a second month, exceeding the 0.2 percent median forecast of economists surveyed.
The core rate increased 2.5 percent from July 2007, the most since January, after a 2.4 percent year-over-year increase the prior month.
Energy expenses jumped 4 percent, after a 6.6 percent gain in the prior month, today's report said. Gasoline prices increased 4.1 percent.
Procter & Gamble Co. was among businesses that responded to the surge in oil earlier this year. The world's largest consumer- products company charged more for Cascade dishwashing detergent, Iams pet food and Gillette razors to offset some of the jump in packaging costs. McDonald's Corp., the world's largest restaurant company, raised prices as ingredient expenses surged.
``Beef and cheese are up, but we've been able to mitigate that cost,'' Chief Executive Officer James Skinner said in an interview in Beijing last week.
The consumer price index 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.
Today's report ``raises the general trajectory'' of interest rates, reducing the chance of cuts and bringing forward the likelihood of increases, William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. Poole is a Bloomberg contributor.
Food prices, which account for about a fifth of the CPI, gained 0.9 percent after a 0.8 percent increase in June.
The increases went beyond food and fuel. Clothing expenses jumped 1.2 percent, the most since 1998. The cost of an airline ticket rose 1.3 percent and education expenses climbed 0.5 percent for a second month.
Rents, which make up almost 40 percent of the core CPI, cooled. A category designed to track rental prices rose 0.1 percent, compared with a 0.3 percent gain in June.
The rate-setting Federal Open Market Committee last week kept its benchmark rate at 2 percent for a second straight meeting. In their statement, policy makers said they expect ``inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.''
Dallas Fed President Richard Fisher dissented in favor of raising rates, and others have indicated concern about leaving borrowing costs unchanged for a prolonged period. Minneapolis Fed chief Gary Stern and Charles Plosser of the Philadelphia Fed said last month the central bank may need to raise rates even before the housing market stabilizes.
Thomas Hoenig of Kansas City said July 16 the current level of rates ``almost certainly raises the risk of higher inflation.''
Today's figures also showed wages decreased 0.8 percent after adjusting for inflation following a 0.9 percent drop in June. They were down 3.1 percent over the last 12 months, the biggest year-over-year decline since 1990. The drop in buying power is one reason economists forecast consumer spending will slow.
Higher gasoline bills and tighter credit reduced automobile purchases in July, causing retail sales to drop for the first time in five months, government figures showed yesterday.
A jump in the cost of imported goods may also give American companies leeway to charge more, economists said. Prices of products made overseas soared 22 percent in the year ended in July, the most since at least 1982, the Labor Department reported yesterday.