US Inflation Up .08% in July

By Michael Bowman

14 August 2008

New statistics show another problem for an already-weak U.S. economy: surging inflation propelled by high food and energy costs.

The U.S. Labor Department reports consumer prices rose 0.8 percent last month after jumping 0.6 percent in May and 1.1 percent in June.

The July number was double what economists had predicted, and puts inflation at 5.6 percent for the last year. That is the biggest 12-month gain seen in nearly two decades.

"We have not seen headline inflation this strong since the early 1990s," said Bill Dunkelberg, chief economist at the National Federation of Independent Businesses. "There is going to be a huge amount of pressure brought to bear on policymakers to start to deal with the inflation problem."

To combat inflation, the U.S. Central Bank typically raises interest rates in an effort to temper economic growth and thereby reduce demand for products and services. With less demand, prices tend to fall.

But that strategy may not be possible, at least for now. The U.S. economy has recorded anemic growth for most of the past year, and fears abound that any clampdown on activity could send the economy into a full-blown recession.

David Weiss, chief economist at the U.S.-based credit and financial research firm Standard and Poor's, says the Federal Reserve will likely resist the urge to raise interest rates in the short term.

"I think the economy is too bad for them to do that right now. But they will do it as soon as they feel safe in doing so," Weiss said. "

The Labor Department reports that wages are not keeping up with inflation. When adjusted for inflation, average weekly earnings fell by more than three percent in July compared to a year ago, the biggest drop since 1990.

Reacting to the economic numbers, White House spokeswoman Dana Perino said the Federal Reserve remains committed to keeping inflation in check. She noted that gasoline prices have moderated in the United States in recent weeks.