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US consumer prices up sharply, job market softens

WASHINGTON - U.S. consumer prices shot up in July at the fastest annual pace in 17 years, underscoring the pressure on Americans who face soaring gasoline and food costs while their job prospects dim and incomes shrink.

A series of bleak reports spotlighted a dilemma faced by Federal Reserve policy-makers who have little room left to lower interest rates to help a weak economy and are hoping for price relief to avoid raising rates soon to tamp down inflation.

The Labor Department said its Consumer Price Index, the most commonly used inflation gauge, rose 0.8 percent in July and year-over-year jumped 5.6 percent, its strongest yearly advance since January 1991 when the first Gulf War was under way.

Costlier energy and food helped push July prices up but, since that time, oil prices have begun to decline. Some analysts said July might mark the worst of inflation pressures but others noted the price increases hit a wide array of goods from clothing to airfares and cigarettes.

"The battering of consumers continues as prices are rising for just about everything," said Joel Naroff, chief economist for Naroff Economic Advisors in Holland, Pennsylvania. But he predicted the Fed won't lift rates soon since it might further demoralize consumers.

The Labor Department issued figures on real earnings that showed the toll rising prices were taking on consumers. Average hourly earnings, adjusted for inflation, fell at a 2.5 percent year-over-year rate in July, the biggest drop since late 1980.

Hope for relief

There is some hope that, as industrialized economies in Europe and North America slow, commodity prices including for oil will keep declining and cause what has become a global inflation shock to ease its grip.

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.

But even the White House conceded that the economy's vigor has been drained and won't reappear for some time, casting a shadow over campaigning for November's presidential elections.

"It will take some time for the economy to turn around but we are confident in the long-term fundamentals and underlying strength of our economy to get us through this period," White House spokeswoman Dana Perino told reporters.

The dollar rose against other currencies as investors weighed a slowdown in Europe's economy against the possibility that U.S. interest rates might go up sooner to curb prices.

Stocks also rose as oil prices declined and U.S. Treasury debt prices gained on hopes inflation risks will ease in coming months and permit the Fed to stave off raising rates.

Jobs tight

U.S. job markets are also 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.

With U.S. housing markets in the worst slump since the Great Depression, home foreclosure activity soared 55 percent in July from year-earlier levels. Foreclosure filings -- default notices, auction sale notices and bank repossessions -- rose 8 percent from June and 55 percent from July 2007 to 272,171, according to RealtyTrac, which tracks property in the various stages until it is actually seized.

Consumers face a squeeze not only on their incomes and from rising costs, but in many cases are seeing accumulated wealth in homes and stocks ebbing away.

Another report from the National Association of Realtors showed the value of existing U.S. single-family homes in metro areas tumbled 7.6 percent in the second quarter from the comparable period in 2007.

About a third of U.S. home transactions now are distress sales that occur because of foreclosures or "short sales" where a mortgage holder takes a loss, the association said.