Consumer Prices Rose in July
As Industrial Output Increased

By JACOB M. SCHLESINGER
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- A fresh batch of government data affirmed that inflation is still benign while the economy continues to enjoy moderate growth.

The consumer price index rose 0.2% last month, a pickup from the 0.1% increase in each of the previous four months, the Labor Department said. So far this year, consumer prices are up at a 1.5% annual rate, less than half the 1996 increase. The tame consumer-price news followed a drop in wholesale prices reported earlier in the week and seems to give Federal Reserve policy makers little reason to raise interest rates when they meet next week.

Industrial production, meanwhile, grew a steady 0.2% in July, though automotive strikes helped keep the increase below June's 0.3%. The Federal Reserve's monthly output report contained further good news on future inflation: The percentage of industrial capacity used last month fell to 83.1% from 83.3% in June. A higher usage rate could presage production bottlenecks that would force higher prices, while a lower rate implies that factories can operate at current levels without such strains.

Inventories Increase

A third report -- the Commerce Department's monthly inventories estimate -- indicated that current economic growth may not be as robust as had been expected, analysts said. Business inventories in June, the latest month calculated, grew 0.7% following a 0.2% May increase.

The mounting stockpiles "will drag down ... production growth during the second half," said Merrill Lynch & Co. economist Bruce Steinberg. Still, the ratio of inventories to sales stayed even at a low 1.37 level in June, implying that companies' supplies weren't significantly out of line with consumer demand.

Figures in all three reports are seasonally adjusted.

The most striking news in the inflation report was that medical-care prices stayed flat in July, the first time since 1975 that consumer health costs didn't increase. The number "is significant since it suggests that benefits costs are not rising as fast as previously thought -- a positive for the inflation outlook," said Jonathan Basile of HSBC Markets Inc.

Energy Prices Seen Rising

On the other hand, energy prices, which fell 0.1% in July and have been a major factor in keeping prices down this year, are likely to turn upward this month. "Secondary data from the Department of Energy appears to show a sharp increase in gasoline prices," said Patrick Jackman, the Labor Department's top consumer-price expert. "If the CPI data, which normally tracks Energy data, exhibits the same thing, we'll see a sharp turnaround in energy prices in August."

Food prices rose 0.3% last month, offsetting the energy-price decline. That meant that the "core" consumer price index -- prices excluding those two volatile sectors -- rose 0.2%. This figure has risen at a 2.4% annual rate so far this year, compared with a 2.6% increase for all of 1996.

Separately, the Labor Department reported that first-time claims for state unemployment benefits increased a seasonally adjusted 12,000 last week, to 316,000. The four-week moving average -- considered a better measure of labor-market conditions -- fell 6,250 to 298,250, the lowest level in eight years. Officials said the figures weren't affected by the United Parcel Service strike.