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September 19, 2006 > Double dose of good economic news

Double dose of good economic news

by Martin Crutsinger

WASHINGTON (AP), Sep 15 _ Inflation slowed last month as Americans finally got a break at the gas pump, lifting consumers' spirits and easing fears the country could stumble into recession.

The Labor Department reported Friday that consumer prices rose just 0.2 percent in August, half the gain in July. With oil prices falling in September, economists predicted more good news ahead on inflation.

That should bolster consumer spending and make a recession much less likely.

The recent drop in gasoline - which had surged above $3 per gallon in early August and is now down to $2.62 nationwide - is helping to lift consumer confidence.

The RBC Cash Index, from the Ipsos international polling firm, showed confidence soared to a seven-month high of 93.7 in early September after a sharp fall in August. A separate consumer survey by the University of Michigan also showed confidence rising.

Analysts said the readings offered hope for a rebound in consumer spending, which slowed dramatically in the spring.

``The decline in energy prices is just the right boost at the right time,'' said Mark Zandi, chief economist at Moody's ``This should ensure that spending remains sturdy enough to keep the expansion intact.''

Wall Street liked the inflation report. The Dow Jones industrial average rose 33.38 points to close at 11,560.77, just 162.21 points shy of its all-time closing high set in January 2000.

Consumers account for two-thirds of total economic activity. They have been under pressure from soaring energy prices, rising interest rates and a weakening housing market.

The spending slowdown in the spring cut overall economic growth to a 2.9 percent pace, down from a sizzling 5.6 percent rate in the first three months of the year. Zandi predicted that economic growth will average about 2.5 percent for the last half of this year.

With inflationary pressures easing, analysts said Federal Reserve policymakers are likely to keep interest rates unchanged _ at their next meeting, Wednesday, and for the rest of 2006. The belief is that the Fed's 17 increases over the past two years have slowed economic growth enough to restrain inflation.

``Healthy growth and diminishing inflation _ it's a soft landing in progress,'' said Bernard Baumohl, chief economist at the Economic Outlook Group, another private forecasting firm.

Not all the economic news on Friday was positive. The Fed reported that output at factories, mines and utilities dropped by 0.1 percent in August, the first setback in seven months.

Several factors contributed, including a drop in utility production that reflected the end of a summer heat wave and a fall in oil production related to the troubles with the Prudhoe Bay pipeline in Alaska.

While manufacturing production was flat in August, analysts looked for gains in coming months, reflecting in part a rebound in consumer demand.

The slowdown in inflation did not help workers' average weekly earnings, which dropped by 0.5 percent in August, after adjustment for inflation, when compared with July.

President Bush said Friday he expected the economy's performance would persuade voters to keep Republicans in control of the House and Senate in the November congressional elections.

``I don't believe the Democrats are going to take over because our record on the economy is strong,'' Bush said, asserting his tax cuts had helped the country withstand a recession, terrorist attacks and last year's hurricanes.

``I certainly hope this election is based upon economic performance,'' Bush said during a Rose Garden news conference.

The Labor Department report on the Consumer Price Index showed that core inflation, which excludes the volatile energy and food sectors, rose a moderate 0.2 percent in August, the same as the increase in overall inflation.

After hitting a record closing high above $77 per barrel in mid-July, crude oil prices have fallen by nearly 20 percent, helping to moderate prices for gasoline and other energy products.

For August, the 0.3 percent rise in overall energy costs reflected a tiny 0.2 percent increase in gasoline prices. Food prices were up 0.3 percent.

Outside of food and energy, clothing prices, which had fallen sharply in July, rebounded by 0.9 percent in August, reflecting higher prices for the fall and winter clothing lines.

Airline fares, which had been rising sharply because of fuel costs, fell by 1.9 percent, the biggest drop since last December.


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