MercoPress. South Atlantic News Agency

Energy impact cooling US economy

United States inflation in July rose 0.4% in July, double the June index driven by a sharp increase in the price of petrol and other energy bills.

However the announcement comes amidst encouraging overall news regarding the performance of the US economy, according to market analysts. Most of the Consumer Price Index rise was caused by a 2.9% increase in energy prices, the highest jump in three months. Core inflation, which excludes food and energy, rose just 0.2%, below analyst predictions of a 0.3% increase. July's slowdown in core inflation was helped by clothing prices dipping 1.2%, their biggest decline in two decades.

Meanwhile the Labour Department's Producer Price Index (wholesale prices) rose 0.1% in July the smallest amount in five months, following a dip in the cost of food which helped offset a further rise in energy bills. Excluding food and energy prices, core wholesale inflation fell by 0.3%.

Furthermore the 0.3% fall in the core wholesale inflation measure was the largest decline for nine months, since a similar 0.3% decline last October. But energy prices in July jumped 1.3% the biggest increase since the 4% of last April. The Federal Reserve also reported that output at US factories, mines and utilities increased by 0.4% last month, just half of the 0.8% rise seen in June. The rise in industrial production was the slowest since no gain at all was recorded for May.

In July the federal budget performance improved with deficit declined more than expected helped by an increase in tax revenue. The deficit was 33.2 billion US dollars considerably lower than that of July 2005, with 53.4 billion US dollars.

US government spending during the month fell to 192.9 billion from 195.5 billion a year ago, while tax receipts surged to 159.8 billion compared with 142 billion. Receipts are at record levels of 1.97 trillion US dollars for the first 10 months of the financial year, the Treasury said. The narrowing of the deficit reflects a surge in government revenues from higher corporate and individual tax receipts.

The government now predicts the deficit for the financial year, which ends in September, will come in at 296 billion, significantly lower than previous estimates. In February, the administration had forecast a deficit of 423 billion. Another slightly positive signal originated in record exports of farming goods which helped to narrow the US trade gap in June.

According to the Department of Commerce June's deficit dipped 0.3% to 64.8 billion, while May's trade gap was revised up by 1.1bn to 64.97 billion.

Imports also hit record levels, led by consumer goods and vehicles, offsetting the effect of rising exports. Despite the improvement, the trade gap for 2006 looks set to surpass last year's record of 716.7 billion as the annual rate is running at 768 billion.

Analysts have blamed rising oil prices for much of the deterioration in the trade gap. Total petroleum imports was equivalent to almost half of June's deficit 27.3 billion, the second highest level for such imports on record after May's 28.3 billion.

Another critical area for the US economy, the housing market, seems to be cooling which is also considered positive. The US Association of Home Builders optimism index dropped in July to its lowest in fifteen years.

Analysts said the housing market has cooled as interest rates have continued to rise, making mortgages more costly. US interest rates were held at 5.25% in August after 20 consecutive increases.

While the Federal Reserve's main aim for the increases was to keep general inflationary pressures under control as the US economy grew, it also cautioned last year that an overheating housing market was a specific concern. Its comments came after the US housing market has boomed in recent years, aided by both the growing economy and low interest rates.

Uncertainty about where the housing market is headed had made potential buyers adopt a "wait and see" attitude. US figures showed that sales of existing homes fell nationwide to an annual rate of 6.693 million units in the April to June quarter, down 7.5% on the same period last year.