WASHINGTON (AP) — More expensive gas, food, clothes and other necessities are squeezing consumers who are already struggling with stagnant pay and worried about a weak economy.
Still, economists say they don’t expect inflation to rise much further. Many forecast that it will peak sometime this year. Gas prices have declined this month and are expected to drop more.
And with the economy still weak, consumers can’t afford much higher costs, limiting the ability of retailers to raise prices.
The Consumer Price Index rose 0.5 percent in July, the Labor Department said Thursday. That followed a drop of 0.2 percent in June.
An increase in gas prices accounted for much of the swing.
The core index, which excludes volatile food and energy costs, rose 0.2 percent. That’s below the 0.3 percent rise in each of the previous two months.
The Federal Reserve and private economists tend to focus on core inflation. It’s seen as a better predictor of price changes than overall inflation is.
Rising inflation reduces consumers’ buying power. Average hourly pay, adjusted for inflation, declined in July and has fallen 1.3 percent in the past year, according to a separate report Thursday.
“It’s bad enough that workers are not getting any pay increases, but the surge in retail prices is cutting into spendable income,” Joel Naroff, chief economist at Naroff Economic Advisors, said in a note to clients.
Worries about economic weakness in the United States and Europe caused stock markets to plummet. The Dow Jones industrial average fell 373 points in mid-day trading. Broader indexes also sank.
Higher inflation could make it harder for Fed Chairman Ben Bernanke to rally support for any new program to buy Treasurys. The Fed’s previous such purchases were intended to keep interest rates low and stimulate the economy. But critics said they raised the risk of higher inflation.
Over the past 12 months, prices have risen 3.6 percent. That’s equal to the 12-month increase in May and June. Core prices over the past 12 months have gone up 1.8 percent — the largest increase since December 2009.
Some inflation can be healthy for the economy because it encourages people to spend and invest rather than sitting on their cash. More spending drives corporate growth, which makes businesses more likely to hire people.
Economists expect core prices will likely continue to rise this year, then fall back next year.
With unemployment high and consumer demand low, “a sustained rise in core price pressures is just not possible,” said Paul Dales, an economist at Capital Economics.
Gas prices increased last month by a seasonally adjusted 4.7 percent after dropping sharply in June.
Clothing prices rose 1.2 percent in July. That was the third straight increase, reflecting higher cotton prices. Over the past 12 months, clothing costs have risen 3.1 percent, the largest annual increase since July 1992.
Cotton prices have fallen 25 percent in the past two months, Dales noted, signaling that clothing costs may moderate.
Higher rents and pricier hotel rooms have pushed the cost of housing up by the most in three years. The government’s inflation figures don’t directly reflect home prices.
Food prices rose 0.4 percent. The cost of meat, dairy, coffee and fruits and vegetables all increased.
The Labor Department said Wednesday that core wholesale prices rose 0.4 percent in July, the most in six months. That’s twice the increase in core consumer prices. The difference suggests that retailers are reluctant to pass on all their higher costs to consumers. That could restrain inflation going forward.
Higher gas and food costs have sent consumer prices sharply higher this year, stoking inflation fears. But core prices, which exclude volatile food and energy costs, have been much tamer. The 1.8 percent annual increase reported in July is within the Federal Reserve’s informal target range of between 1.5 percent and 2 percent.
Fed policymakers expect core consumer inflation to average between 1.5 percent and 1.8 percent this year.
Falling oil and gas prices should help keep inflation in check. The average nationwide price of gas fell to $3.58 a gallon Wednesday, down about 9 cents from a month earlier. Americans are also driving less, reducing demand for gasoline.
Last week, Fed policymakers said they will keep a benchmark short-term rate at nearly zero at least until mid-2013. Previously, the central bank had never given a clear time frame. It hopes the certainty of low rates will encourage consumers and businesses to borrow and spend more.