Reports show inflation under control

WASHINGTON -- Inflation is under control, consumers have become more cautious and layoffs are stabilizing, according to economic data released Thursday. The fresh reports reinforce the notion that the Federal Reserve probably will leave interest rates unchanged next week.

Wholesale prices in July dipped by 0.2 percent from the previous month, helped by cheaper cars and trucks, the Labor Department said. For the 12 months ending in July, wholesale prices fell 1.1 percent.

Although consumers -- the economy's lifeblood -- have kept up their spending this year, they now appear to be watching their money more closely, economists said.

The biggest retailers reported lackluster sales in July. It is a sign consumers have grown more cautious because of job worries, the volatile stock market and the economy's health.

Even discount stores, which have fared better than most other retailers, stumbled in July. Wal-Mart Stores Inc., the world's largest retailer, and Target Corp. reported disappointing sales. Department stores and mall-based apparel stores again suffered, particularly Federated Department Stores Inc., May Department Stores Inc. and Gap Inc.

On a more positive note, fewer Americans filed new claims for unemployment insurance last week.

New claims dropped by a seasonally adjusted 15,000 to 376,000.

The more stable four-week moving average of claims went down to 379,000 last week, the lowest level in 17 months. The moving average has been below the 400,000 mark -- a level associated with weakness in the job market -- for eight straight weeks.

Wall Street was bolstered by the new economic data, with the Dow Jones industrial average soaring by 256 points Thursday to close at 8,712. It was the third straight session with a triple-digit gain, something the battered stock market last enjoyed 17 months ago.

Even if companies reduce the pace of layoffs, they will not be in a rush to hire, economists predict. Because of uncertainty about the economic recovery, companies have been reluctant to make big commitments in hiring and capital spending.

"The job market is really the big wild card in assessing the economy," said William Cheney, chief economist at John Hancock Mutual Life Insurance Co.

The economy has slowed to a growth rate of just 1.1 percent in the second quarter, compared with a brisk 5 percent pace in the first three months of this year.

Early economic reports thus far have pointed to a disappointing start for the second half of 2002, leading some analysts to project sluggish economic growth for the period.

Against this backdrop, economists believe the Fed at its meeting Tuesday is likely to hold the federal funds rate -- the interest banks charge each other on overnight loans -- at a 40-year low of 1.75 percent.

That would mean the commercial banks' prime lending rate -- the benchmark for many consumer and business loans -- would remain at 4.75 percent, the lowest level in decades.

Some economists have not ruled out a cut to the funds rate, but they said it was a long shot.

"People with their eyes strictly on the equity markets are begging, cajoling and screaming for a Fed rate cut," said economist Joel Naroff of Naroff Economic Advisors. "With this type of inflation report, the Fed could probably go to zero and it wouldn't create a whole lot of inflation. But it wouldn't create a whole lot of additional demand, either."

In July, car prices dropped 1.5 percent, the biggest decline since October. Prices for light trucks, such as sport utility vehicles, fell 1.6 percent. More generous incentives from automakers were behind the falling prices, economists said.

Prices for food dropped 0.1 percent in July. Falling prices for fruits, dairy products, beef and chicken swamped rising prices for vegetables, pork and fish.

Energy prices nudged up 0.1 percent in July. Higher prices for gasoline and home heating oil were blunted by lower prices for residential natural gas and residential electric power.

Excluding energy and food prices, the "core" rate of inflation at the wholesale level fell by 0.3 percent in July, the biggest decline in nine months.

------

On the Net:

Wholesale prices and jobless claims: http://www.bls.gov/