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Wednesday, 18 September, 2002, 16:22 GMT 17:22 UK
US economy hints at optimism
shoppers
US prices were higher in July
Latest economic figures from the US have offered a glimmer of hope that the worst could be over.

Trade figures showed America's deficit had narrowed by 6% in July, to its lowest level since March.

At the same time, inflation showed a larger-than-expected rise in July, boosted by energy and tobacco prices.

Economists were cheered by the figures, arguing that they could mean interest rates will be kept level when the Federal Reserve meets later this month.

Price hikes

Consumer prices rose by 0.3% in July, the biggest jump in four months and above expectations of a 0.2% rise.

The lift was fuelled in part by the rising cost of tobacco and clothing, which grew by 2.6% and 1.1%.


It's a pleasant surprise that the third quarter is holding up better than we thought

Cary Leahey, Deutsche Bank Securities

Energy prices also played a part, up 0.6%, as the threat of an attack on Iraq fuelled fears that oil supply would be disrupted.

Analysts were surprised by the gains, but cautioned against seeing inflation as a threat.

Steve Ricchiuto, chief economist at ABN Amro, said: "The message that comes out... is you don't have deflation, and you're not even near deflation as some people are worried about".

'Pleasant surprise'

The US trade deficit also painted a more encouraging economic picture, down by 6% in July to $34.6bn.

This is the lowest level since March and was also unexpected.

"It's a pleasant surprise that the third quarter is holding up better than we thought," said Cary Leahey, economist at Deutsche Bank Securities.

In July, imports fell by 1% to $117.8bn while exports rose by 1.3% to $82.2bn.

While encouraging, the trade deficit is still way above last year's levels after reaching an all-time high in May.

For the year as a whole, the deficit is running at $412bn, far higher than last year's deficit of $358bn.

Glimmer of good news

Analysts say the encouraging signs of improvement mean the Federal Reserve is likely to hold interest rates level at their next meeting on 24 September.

The Fed has said it would only cut rates again - after the 11 cuts last year - if the general economy appeared to be weak. It said inflation was less of a threat.

Mr Leahey said: "These are both good numbers for the economy because a little inflation isn't too bad."

See also:

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