US prices in surprise July slide

Falling inflation might deter the Federal Reserve from raising rates

US consumer prices fell by 0.1% in July, the first monthly fall since November last year.

The slide accompanied falling gasoline prices, sparking speculation about whether the US central bank would raise rates when it meets in September.

The Federal Reserve lifted interest rates by a quarter of a percentage point to 1.5% at its last meeting in July, its second tightening this year.

Core prices, which exclude food and energy prices, rose 0.1% in July.

Change of heart

Consumer prices rose at an annual rate of 4.1% during the first seven months of the year, sharply higher than the 1.9% rise seen for all of 2003.

The consumer price index (CPI) has been pushed higher by rising oil prices.

The price of crude oil hit $45 a barrel for the first time last week, and is expected to remain firm despite slipping back this week under the influence of relief at a peaceful referendum in oil-rich Venezuela.

Analysts are softening their expectations of a further near-term rate rise following Tuesday's inflation report.

"The inflation scares earlier this year now seems to have corrected as the economy slows," said David Sloan, economist at 4Cast.

"This is quite an encouraging figure for the Fed. If we get more soft data, one may wonder whether they would continue to tighten."

Economic reversals

Other reports released on Tuesday lent support to the view that the economic weakening seen in June might only have been temporary.

The output of US factories, mines and utilities rose at their highest capacity in more than three years, a Federal Reserve report said.

Industrial output rose 0.4% in July, nearly reversing the 0.5% drop seen in June.

The construction of new homes and apartments rose by 8.3% in July, the Construction Department reported on Tuesday, again reversing the decline seen in June.