WRAPUP 4-U.S. consumer prices drop, sentiment sours

* Consumer prices fall for third straight month in June

* Core CPI edges up with broad gains as rental costs rise

* Year-on-year CPI lowest since October; core at 1960s low

* Consumer sentiment drops to 11 month low in July

(Updates markets to close)

By Lucia Mutikani

WASHINGTON, July 16 (BestGrowthStock) – Weak energy costs pushed
U.S. consumer prices down for a third straight month in June
while consumer sentiment dropped to a near one-year low in
July, highlighting the sluggishness of the economic recovery.

However, prices excluding food and energy rose 0.2 percent,
their largest monthly gain since October, the Labor Department
said on Friday. Analysts said that suggested deflation risks
were easing and called it further proof the economy was not
slipping back into recession.

“We are seeing some loss of momentum in growth, but it’s
not the start of a double-dip. The core inflation number should
lessen deflation fears, the economic recovery is still intact,”
said Jim O’Sullivan, chief economist at MF Global in New York.

The Consumer Price Index dipped 0.1 percent last month
after falling 0.2 percent in May. Analysts had expected
consumer prices to hold steady.

Energy prices fell 2.9 percent and food prices were flat.

But a rise in rental costs after months of stagnation
allowed the core CPI to move higher. The core rate had risen
0.1 percent in May and markets had expected a similar gain last
month.

Analysts said the rental costs’ increase was encouraging
and reflected a labor market that was starting to create jobs,
although at a pedestrian pace.

A second report showed consumer sentiment early this month
pulled back from a near 2-1/2 year high on worries about income
and jobs. The Thomson Reuters/University of Michigan’s consumer
sentiment index plummeted to 66.5 from 76.0 in June. That was
below market expectations for 74.5. [ID:nN16126985]

Prices for safe-haven U.S. government debt rallied as
investors viewed the data as suggesting the Federal Reserve
would keep interest rates near zero well into 2011. The U.S.
dollar fell to a seven-month low against the yen.

The dour confidence report and weak revenues from corporate
giants Bank of America (BAC.N: ), Citigroup (C.N: ) and General
Electric (GE.N: ) hammered stocks on Wall Street. Major U.S.
stock indices ended down more than 2.5 percent.

MODEST RECOVERY

“It points to the simple fact that this recovery is modest
at best. Businesses do not have pricing power,” said Joel
Naroff of Naroff Economic Advisors in Holland, Pennsylvania.
“Consumers are still concerned about the recovery, they are not
going to shop till they drop.”

Consumer prices have not declined for three successive
months since October-December 2008. In the 12 months to June,
the CPI rose 1.1 percent, the smallest advance since October,
and a sharp slowdown from the 2 percent in the period through
May.

Recent data ranging from consumer spending to manufacturing
imply the recovery from the longest and deepest recession since
the 1930s has come close to stalling in recent months.

With inflation subdued, the unemployment rate at a lofty
9.5 percent and domestic demand lackluster, economists say the
U.S. central bank should not have to raise interest rates
before the second half of next year.

Wholesale price readings have also suggested scant
inflation pressure. Prices received by farms, factories and
refineries fell for a third straight month in June, the
government said on Thursday.

Minutes of the Fed’s last policy meeting, released on
Wednesday, showed a few officials have begun to worry about the
risk of deflation — an economically disabling, broad-based
decline in consumer prices.

Others, however, have argued that the U.S. economic
recovery appears on solid ground and believe inflation is
unlikely to fall much more.

Indeed, some economists said the CPI report suggested core
inflation, which slowed sharply during the recession, may have
already bottomed.

“I don’t see deflation as an issue. I don’t see inflation
as an issue. I just see modest to moderate inflation for at
least six to twelve months,” said Naroff.

Although retail sales have dropped for two months in a row,
retailers are still managing to squeeze through price
increases, the inflation report showed.

The monthly core inflation rate was bumped up by a 0.8
percent in apparel costs, the largest increase in 16 months.
Used cars and trucks, which rose 0.9 percent last month, also
contributed to the rise in core inflation, as did a 1 percent
rise in tobacco prices.

In the 12 months to June, the core inflation rate rose 0.9
percent, increasing by the same margin for a third straight
month. The rise was in line with market expectations and
matched the lowest core inflation rate since January 1966.

Most Fed officials would like to see inflation in a 1.7
percent to 2 percent range.

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CPI graphic: http://link.reuters.com/fez87m
Consumer sentiment graphic: http://link.reuters.com/kud97m

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(Additional reporting by Richard Leong in New York; Editing by
Kenneth Barry)

WRAPUP 4-U.S. consumer prices drop, sentiment sours