Gasoline prices jump at fastest pace in years

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WASHINGTON (AP) Consumer prices rose a moderate 0.3 percent in July even though gasoline prices jumped sharply and airline fares went up at the fastest pace in six years, the Labor Department said today.

The government said industrial output advanced 0.7 percent last month, the biggest increase in four months, and construction on new homes and apartments rebounded in July, reflecting continued strength in the U.S. economy.

The 0.3 percent increase in the Labor Department's Consumer Price Index followed two straight months in which prices remained frozen.

July's inflation report was right in line with many analysts' expectations and eased inflation concerns in financial markets. Prices in the inflation-sensitive bond market rallied after release of the CPI report.

Many analysts and investors continue to believe that despite the tame inflation reports the central bank will raise interest rates next week for the second time this year. And analysts believe the Fed will then be content to sit back and watch developments for the rest of the year.

The Federal Reserve said the 0.7 percent advance in output at factories, mines and utilities followed lackluster gains of 0.1 percent in June and 0.2 percent in May.

Manufacturing output rose 0.6 percent in July, the strongest advance since October. Analysts believe that U.S. factories, hard hit by the loss of export markets, are beginning to recover.

The increase in output, which reflected a weather-related increase in output at utility plants, pushed the overall operating rate up to 80.7 percent of capacity in July. This is still far below the level at which analysts begin to worry about production bottlenecks.

The Commerce Department said housing construction rose 5.7 percent to a seasonally adjusted annual rate of 1.66 million units in July, better than analysts had been expecting. Housing starts had fallen 5.8 percent in June.

The 0.3 percent increase in the CPI was the biggest since a 0.7 percent surge in April, the largest one-month gain in nine years. That April increase had put on the Fed on inflation alert and was followed by a June 30 Fed increase in interest rates, the first in two years.

The big jump in consumer prices in April resulted from a sharp increase in gasoline and other energy prices, which shot up 6.1 percent. The overall price moderation in both May and June reflected a partial retreat in that huge runup.

In July, energy prices surged again,rising 2.1 percent.

Gasoline prices, which had soared 15 percent in April, were up 4.3 percent in July and so far this year have climbed 30.2 percent.

The rise in gasoline prices is coming after the Organization of Petroleum Exporting Countries cut production and global demand began to pick up, reflecting economic recovery in many countries damaged by the Asian currency crisis.

So far this year, overall consumer prices are rising at an annual rate of 2.4 percent, compared with a 1.6 percent increase for all of 1998. This acceleration reflects the rebound in energy costs, which were rising at a rate of 12.4 percent in the first seven months of this year after dropping 8.8 percent for all of 1998.

Food prices rose just 0.2 percent in July, after no change in June. A big 3 percent drop in fresh fruit prices helped offset a 2.5 percent increase in vegetable prices in July.

One of the biggest price increases outside of food and energy was in airline fares, which jumped 6.5 percent in July, the largest increase since October 1992. Airline fares had fallen in May and June.

Clothing prices fell for the third straight month, a big 0.9 percent drop in July that reflected heavy discounting.

Medical care was up 0.3 percent in July with prescription drugs and medical supplies rising a sharp 0.6 percent.

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