Good News For American Workers In Latest Inflation Report: 'Goldilocks' Numbers Are Not Too Hot Or Too Cold

For American workers, the latest economic data was just right: The U.S. economy appears safe from the threat of an unruly spike in prices or a precipitous end to the relief doled out by the Federal Reserve.

That was the takeaway as economists sifted through data released by the government on Tuesday, most prominently an inflation report that showed prices for goods and services climbing by 1.9 percent in June, a slight easing from the 2 percent increase seen a month earlier.

While consumers may be forgiven for assuming that no rise in prices is a good thing, economists have been looking for inflation to come in right around the 2 percent level. A significantly faster rise in prices could prompt the Fed to hike interest rates and dampen economic growth in a bid to to limit further price hikes -- a step that would almost certainly eliminate jobs and exacerbate unemployment.

On the other hand, a sharper dip in inflation might have amplified worries that American companies are suffering weak demand for their goods and services, forcing them to cut the price of their wares to coax buyers into the market. This, too, would tend to hurt employment as American companies lowered production targets.

Instead, the data came in at a level that would please Goldilocks: neither too hot nor too cold, but suggesting a modest and sustainable pace of economic expansion that should see continued growth in working opportunities.

“As long as inflation remains weak, that should boost purchasing power and fuel growth and job creation,” said Aneta Markowska, chief U.S. economist for French bank Societe Generale in New York. “But right now we are looking at inflation that’s growing in line with hourly wages. People are earning enough to keep up with inflation but not necessarily beyond that.”

Most economists concurred, pronouncing the pace of inflation fast enough to indicate overall economic growth but not rapid enough to discourage buyers.

“That’s nothing to worry about,” said Paul Dales, senior U.S. economist for London-based Capital Economics. “It will probably rise a bit, but not much.”

The Fed has indicated that it hopes to see inflation -- the increase in price levels of goods and services -- to be at least 2 percent but not much higher to keep unemployment from rising above its current 6.1 percent. (Seven years ago in the run-up to the Great Recession, unemployment sat below 5 percent while prices were rising at a barely detectable 0.1 percent annualized rate.)

French bank Societe Generale forecasts a rebound in U.S. consumer prices, pushing up the consumer price index (CPI) -- a monthly measure used by economists to track changes in the price levels of products households commonly buy -- by about 2.3 percent by the end of the year.

In June, core consumer prices, which exclude energy and food prices, increased 0.1 percent, the smallest gain in four months.

Although prices for meat, milk, gasoline and other things most Americans buy regularly rose, prices of home goods like washing machines, furniture, dishes and lamps have fallen by 1.5 percent in the past year, the quickest pace since the recession’s nadir in 2009.

Prices for so-called durable goods have fallen since a peak in 1997 and are now at 1988 levels, assuming today’s prices reflect the improved quality of the products. That means almost every household durable good, from curtains to TVs, is cheaper to buy today than 17 years ago.

“I think it’s got a lot to do with technology,” Dales said. “When the first person designed a plasma TV, it was cutting edge and the processes weren’t very efficient…. Over time as these items become more popular, the cost of producing them decreases.”

“It’s also the case that a lot of the production has been shifted to lower cost countries,” he added. “If you were going to manufacture a TV in the U.S., costs would be higher than in India or parts of China.”

The falling prices are not just an effect of weak demand after the recession trimmed families’ budgets. Sluggish economic growth in China has also dragged down prices of imports like household items and clothing, as Chinese factories have had excess capacity and supply that lowered wages and prices there, Markowska said. “That slowdown [in China] has pretty much run its course,” she said. “Things appear to be stabilizing or picking up a bit.”

Meanwhile, rising aluminum prices and growing rent and home sales could increase demand and prices for household goods, experts suggested. Aluminum prices are set to rise with demand as producers refrain from adding capacity, and a seven-year slowdown in the housing market has left room for a resurgence in home construction.

Existing home sales increased 2.6 percent in June, reaching 5 million sales for the first time since October, the National Association of Realtors reported Tuesday. June’s new home sales data will come from the Commerce Department on Thursday. In May, sales of new homes increased by 18.6 percent to an annual rate of 504,000 homes, the quickest pace since May 2008.

The rebound in home sales and manufacturing, in turn, seem to promise higher economic growth for the rest of the year, which would offset a decline in shopping caused by the unexpectedly cold weather at the beginning of this year. Global research firm IHS forecasts that U.S. growth will end the year at 1.7 percent but rise to 3 percent by the end of 2015. On Wednesday, the International Monetary Fund revised its forecast for U.S. economic growth to “a disappointing 1.7 percent” -- but like IHS, it projects 3 percent growth for 2015.