by Joseph Kenny | 02/10/08

A decline in the price of gas has led to the slimmest increase in consumer prices in 8 months.  The news means that inflationary worries may be abating.

The U.S. Labor Department reports that consumer prices inched up 0.1% in July.  Meanwhile, the core inflation rate increased only 0.2%, the same degree of increase as the month before.

As a result, it appears that the Federal Reserve may have the breathing space needed to reduce interest rates in order to deal with the volatile stock and credit sectors.  A cut in interest rates could come as early as September.

Meanwhile, energy prices continue to skyrocket.  During the first 7 months of 2007, energy prices grew at a staggering annual rate of 21.3%.  Food prices are increasing at a rate of 5.7%, compared to a modest hike of 2.1% last year.  Prices appear to have stabilized for beef, poultry, and vegetables, which represent a significant share of the American diet.

Interestingly enough, the price of clothes is inching upward after four straight months of declining prices.

Clothing costs rose 0.4%, while the cost of medical care zoomed up 0.6 percent.  That represents the largest gain in half a year.

The hope among investors is that the Fed will consider inflation to have been squelched and will therefore reduce the interest rate.  Still, the Fed may require additional evidence before it takes that critical step.

Although the price of gasoline dipped in July, fuel costs remain a major concern.  The overall rise in energy costs this year has had a ripple effect throughout the entire economy, resulting in increases in food prices as well.

However, it is the housing slump that appears to be having the most negative impact on the economy at the current time.  In addition to the problem of falling housing prices, some consumers are having trouble meeting their monthly mortgage payments, resulting in an increase in the default rate.