US prices fall as housing market grows

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The Independent Online

United States policymakers received a welcome fillip yesterday after official figures showed consumer prices in July dropped for the first time in eight months and growth returned to the home building market.

United States policymakers received a welcome fillip yesterday after official figures showed consumer prices in July dropped for the first time in eight months and growth returned to the home building market.

Economists said the data would ease pressure on the Federal Reserve to make a series of aggressive interest rate rises. The consumer price index (CPI), the most widely used gauge of US inflation, slid 0.1 per cent in July, well below Wall Street's expectations, taking the annual increase, excluding food and energy, to 1.8 per cent.

John Person, head financial analyst at Infinity Brokerage Services, said: "This is bullish news all around. Lower-than-expected inflation may keep the Fed at bay from raising interest rates aggressively which will help foster the growth in the economy." A drop in energy prices, which had soared in recent months, contributed to the unexpected fall in CPI. Gasoline prices fell 4.2 per cent in July, after a 3.1 per cent rise in June.

Higher costs for lodging away from home largely offset lower prices for apparel, recreation and education and communication, the Labour Department report said. The weak inflation figures prompted oil prices to edge back to recent record highs as traders bet that consumer demand in the US would rebound after a weak couple of months. US light crude oil rose 67 cents to $46.72 a barrel.

A raft of stronger US data lent credence to the view from Alan Greenspan, the Fed's chairman, that America's economic "soft patch" would be short lived. Increases in homebuilding and business spending on equipment suggested the economy could rebound after the weakest quarter for economic growth in more than a year.

The Fed said industrial production rose 0.4 per cent last month after a downwardly revised 0.5 per cent drop in June. The gain pushed the amount of productive capacity in use at US factories, mines and utilities to 77.1 per cent - their best for three years. Manufacturers offered a particular bright spot, pushing output up a solid 0.6 per cent after a 0.2 per cent drop in June. Factories operated at 76.3 per cent of capacity, their fastest pace since April 2001. Mining output also rose. US housing starts recorded their best month in July since September 2002, soaring 8.3 per cent.

Meanwhile, in Germany, concerns mounted that the recovery of Europe's biggest economy could be curtailed after an industry report showed investor confidence plunged to its lowest level in more than a year.

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