Prices up, but down is a bigger threat
A Labor Department report Wednesday showed consumer prices making their biggest jump last month in almost a year. But overall prices are down 1.4 percent from this time last year — the biggest decline in almost six decades.
That's bad news for business executives. High unemployment and stagnant wages mean they risk losing customers if they raise their prices.
After sales rose for three months at Mitchell & Best Homebuilders of Rockville, Md., Vice CEO Marty Mitchell thought the time was right to try hiking prices at one of his eight developments.
But so far the 2 percent bump has been a failure — a disappointment for the company because "we're actually selling for less than the true cost," Mitchell said.
Consumer prices were up 0.7 percent in June, the Labor Department said, mostly because of higher energy prices. Gasoline was 17 percent more expensive in June than in May.
Food prices were up only slightly, and dairy products were cheaper. Core inflation, which excludes food and energy, posted a moderate 0.2 percent rise in June, well within the Federal Reserve's comfort zone.
"You are not going to get serious domestic inflationary problems until you get closer to full employment, and that is going to take at least five years," said David Wyss, chief economist at Standard & Poor's in New York.
The Fed delivered a similar message Wednesday, forecasting that unemployment would top 10 percent this year and saying it expects inflation will "remain subdued for some time."
Economists say there are two threats that could scuttle their forecast of benign inflation — oil and the dollar. If Middle East tensions suddenly sent oil prices surging, or if the dollar started falling precipitously, all bets would be off.
Oil prices appear to be in check. They rose in June but have fallen since, and gas prices are down to a national average of about $2.50 this week, 17 cents lower than a month ago.
But if foreign investors worried about soaring U.S. deficits start selling their Treasury securities, that could send the dollar down. Treasury Secretary Timothy Geithner was in the Middle East this week to reassure investors in U.S. debt that the administration is serious about tackling the deficit once the economy comes back.
The jump in consumer prices in June did stir some inflationary concerns on Wall Street, sending bond prices lower for a third straight day. Strong earnings and an upbeat forecast from Intel Corp. helped push the Dow Jones industrials up 257 points, their biggest gain since March.
Separately, the Fed said the decline in factory output last month was slower than in May, a possible sign the recession is easing. Factories are running well below capacity, and idle machinery is further evidence to economists that the risk of inflation is low.
"There is intense pressure on businesses to either hold the line or cut prices," said Mark Zandi, chief economist at Moody's Economy.com.
Among other signs in the economy that inflation is in check:
— Prices for personal computers and electronic gadgets have dropped, or stayed steady with added features. Even Apple Inc., known for its premium products, recently cut the price of the cheapest iPhone in half and took $300 off some laptops.
— Drug companies did raise prices slightly on some medications with few signification rivals, but prices for most prescription drugs should stay flat or drop, predicted analyst Steve Brozak of WBB Securities.
— Airlines are unlikely to raise fares anytime soon. Demand, especially among business travelers, remains soft and is expected to stay that way. Low-fare specialist Southwest cut fares ahead of the traditionally slower fall travel season.
There are some industries that feel comfortable raising prices, even as evidence of a weak economy lurks:
— Movie theaters are enjoying an attendance boom as households seek bargain entertainment. Attendance is up 8 percent this year, and the average ticket in the U.S. and Canada is up about 2 percent.
— Railroad operator CSX Corp. expects to raise prices this year, partly because shippers don't have many alternatives.
— Food companies including Kellogg Co. and Kraft Foods Inc. have raised prices to keep up with ingredients that are becoming more expensive. To keep cost-conscious customers from straying, they are offering more promotions like buy-one-get-one-free.
AP Business Writers Jeannine Aversa, John Porretto, Alex Veiga, Samantha Bonkamp, Linda Johnson, Jessica Mintz, Emily Fredrix and Ryan Nakashima contributed to this report.