Inflation Heating Up, But Some Think It Won't Last

U.S. consumer prices climbed at twice the rate expected in July and job prospects kept softening last week, adding to the country's economic woes.

The government's Consumer Price Index, the most commonly used inflation gauge, rose 0.8 percent in July and on a year-over-year basis jumped 5.6 percent, its strongest advance since January 1991 when the first Gulf War was occurring.

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Costlier energy and food helped push July prices up but, since that time, oil prices have begun to decline and analysts hoped that July might mark a watershed on inflation pressures.

• What the Markets Make of the Numbers

"If we don't get an unexpected shock that pushes commodity prices back up, this might be the worst inflation news that we'll get for a while," said Gary Thayer, senior economist with Wachovia Securities in St. Louis.

Core consumer prices, which exclude food and energy items, gained 0.3 percent in each of June and July and rose 2.5 percent last month on a year-over-year basis.

"It is certainly above expectations here, but I think we've probably seen, for the near-term anyway, the worst of the inflation readings," said Keith Hembre, chief economist for First American Funds in Minneapolis.

The dollar rose and Treasuries fell after the data but quickly reversed course, with the dollar standing little changed on the day and government bond prices higher.

Stocks opened lower as investors worried that higher inflation could hinder the Federal Reserve's effort to keep interest rates low and kick-start the economy, weakened by the housing slump.

Video: Watch instant analysis of this morning's economic numbers.

In addition, the data showing continued deterioration in the labor market could fuel pessimism among consumers, already struggling with sliding home values and mounting home foreclosures.

"The overall picture is that inflation is still on the Fed's radar screen. We don't expect the Fed to change rate policy any time soon," said Dana Saporta, economist at Dresdner Kleinwort Securities in New York.

U.S. job markets are severely strained, adding to the burden on consumers who fuel two-thirds of economic activity through their purchases of goods and services.

In a separate report, the Labor Department said another 450,000 workers filed new claims for jobless benefits last week, down 10,000 from a week earlier but still at levels that are associated with recession.

In fact, a four-week moving average of new jobless claims that is regarded as a better gauge of underlying labor trends because it irons out week-to-week volatility, climbed to 440,500 from 421,000 the week before.

That was the highest reading for the moving average in more than six years, since it hit 445,500 in April 2002.

The CPI report showed energy prices kept pushing higher, rising 4 percent in July after a 6.6 percent June gain.

That put energy costs up 29.3 percent on a year-over-year basis, a fact that motorists who pay 37.9 percent more for gasoline than a year earlier know painfully well.

Food costs rose 0.9 percent following a 0.8 percent June increase, putting them 6 percent above levels a year ago.

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