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WASHINGTON (AFX) - US retail prices rose at a slower pace in June than they have in the past few months, but the core inflation rose at a higher-than-expected pace, the Labor Department said Wednesday.
The department said its consumer price index rose 0.2 pct in June, in line with expectations. It had risen by 0.4 pct and 0.6 pct May and April respectively.
Core inflation which excludes energy and food, was up 0.3 percent, slightly higher than the 0.2 pct expected. That marked the fourth straight 0.3 percent monthly gain and translated into an annualised increase of 3.6 pct over the past quarter.
The news makes it more likely the Federal Reserve will continue to raise interest rates at its August 8 meeting.
Prior to the release, many analysts said if the CPI core-rate rose by 0.3 pct or more, the Fed will be forced to continue raising the key federal funds rate to ward off inflation.
'This is the time in the economic cycle that tries the Fed Chairman's soul,' said Joel Naroff of Naroff Economic Advisors.
At present, the Federal Reserve is in a difficult place. Core inflation is running higher than the Fed's comfort level but price pressures are predicted to ease as GDP growth slows in the coming months.
Naroff said Fed Chairman Ben Bernanke's job is doubly difficult, because he is new and doesn't have the confidence of the markets the way a seasoned chairman would.
Naroff said the Fed has been 'hiding behind the core number' to give them the most flexibility, but 'the core has turned ugly on them,' referring to the four consecutive increases of 0.3 pct.
Investors will learn more about the Fed's views later this morning, when Bernanke takes questions from lawmakers on Capitol Hill during his semi-annual outlook on the monetary policy and the economy.
The Fed has raised the fed funds rate 17 consecutive times to its current 5.25 pct.
On an unadjusted basis, the headline CPI has risen 4.3 pct in the past year, the fastest since October 2005. The core-rate has risen 2.6 pct in 12 months, the fastest since December 2001.
Energy prices fell 0.9 pct in June after jumping 2.4 pct in May and 3.9 pct in April.
Food prices rose 0.3 pct in June after rising 0.2 pct in the prior month.
In a separate report, the Commerce Department said construction of new homes fell by 5.3 pct in June, another signal that the once-booming housing market is beginning to slow.
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