August 15, 2008

America’s Inflation at 17-Year Peakof 5.6%

By Stephen Foley

inflation in the United States soared to a 17-year high last month, dealing a blow to hopes that falling commodities prices will quickly take pressure off the American consumer.

The rising cost of airline tickets, clothing and even tobacco compounded a high year-on-year increase in petrol and food prices, taking the annual inflation rate to 5.6 per cent, the highest since January 1991 and suggesting that inflation could be taking root in the economy.

The month-on-month increase in headline inflation was twice what Wall Street economists had been predicting, and even the core rate - which strips out volatile food and energy prices - was up more strongly than expected.

The consumer price data came alongside more evidence of a deteriorating US economy, which effectively ties the hands of the Federal Reserve, which might otherwise want to raise interest rates to stamp out inflation. The rate-setting Federal Open Market Committee has said it expects inflation to moderate later in the year, and a decline in the oil price and other commodities only took hold mid-way through July.

"You could call this stagflation-lite," says Kevin Logan, senior US economist at Dresdner Kleinwort. "Inflation in energy prices is passing through to other items and the disinflation we have previously seen from cheap imports is now clearly a thing of the past. The Fed is in a predicament. It could raise rates to drive down demand, but how much do you want to sacrifice for that? New jobless claims are already definitely at recession levels."

Some 450,000 people signed up for unemployment benefits last week, a slight decline on the previous week, but a total of 3.4 million Americans have now been claiming benefit for more than one week, the highest number since November 2003.

Earnings for those in work are not keeping up with rising prices, according to official figures. Adjusted for inflation, weekly earnings fell 0.8 per cent in July.

Meanwhile, the housing market continues to worsen. Foreclosure filings for July rose 8 per cent from the previous month and are 55 per cent ahead of this time last year. The property-listing service RealtyTrac said there were foreclosure filings on 272,171 US homes last month, one for every 464 households.

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