Economy’s Moderation Continues

Consumer prices remained under control in July as the economy continued its moderate expansion, according to a batch of reports released Thursday.

“The data continues to paint a picture of an economy that is performing exceptionally well,” said economist Chris Varvares of Macroeconomic Advisers in St. Louis. “Inflation is still very tame, with no sign of acceleration.”

Yields on long-term Treasury bonds fell in response.

“When you wrap it all up, it means all is well on the American scene,” said Robert Dederick, an economic consultant at Chicago’s Northern Trust Co. “Growth is sedate and inflation is very much in check.”

The consumer price index rose 0.2% in July, the Labor Department said.

Although the July increase in the CPI is higher than June’s 0.1% rise, it also translates into a 1.5% annual increase for the first seven months of this year--the smallest rise for that period since 1986 and down from a 3.4% increase in the first seven months of 1996.

Separately, the Federal Reserve Board said industrial production slowed to a 0.2% increase in July from June’s 0.3% rise. The July gain is in line with expectations, though, and the plant-use rate--another gauge of inflationary pressures--declined from a month earlier.

Thursday’s positive inflation news comes a day after the government said producer prices fell for the seventh month in a row in July, the first time that has happened since 1931, when Herbert Hoover was in the White House.

Investors were heartened by the continued good news on growth and inflation. The benchmark 30-year bond yield fell to 6.54% from 6.62% on Wednesday. Stocks continued to gyrate. After a morning rally of as much as 70 points, the Dow Jones industrial average plunged as much as 60 points. The Dow finished the day with a gain of about 14 points to close at 7,942.03. The dollar rose against other major currencies.

The Fed report lacked any suggestion of increased inflationary pressures. It said the nation’s industries operated at 83.1% of capacity, down from 83.3% in June and well below the 85% level that typically could result in bottlenecks and higher prices.

A Commerce Department report indicates production may not be so strong during the second half of 1997. It said business inventories jumped 0.7% in June, which is “good news for production in the second quarter but bad news for the third quarter,” Varvares said. “It sets up a situation where you expect production to be pulled back” until the backlog is reduced.

The Labor Department said in a second report that new claims for unemployment insurance rose by 12,000 last week to a seasonally adjusted 316,000, the highest in four weeks but in a range that analysts say is consistent with a tight labor market.

Indeed, the four-week average of new claims fell for a fifth straight week to its lowest level since midwinter 1989. Analysts prefer to track the less volatile four-week average because it smooths out spikes in the weekly reports.

Consumer prices were held back by a 0.1% decline in energy prices in July, the fifth month in a row without an increase, offset partially by a 0.3% jump in food costs.

The so-called core inflation rate--which excludes the volatile food and energy costs--was up at an annual rate of just 2.4% this year, compared with 2.6% in 1996.

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Consumer Prices

Percentage change, month to month, seasonally adjusted:

July, 1997: +0.2%

Source: Bureau of Labor Statistics