* Consumer prices flat in July for second straight month
* Year-on-year CPI up 1.4 percent, smallest rise since Nov
* Core CPI up 0.1 percent, smallest gain since February
* Industrial output rises 0.6 percent in July
By Lucia Mutikani
WASHINGTON, Aug 15 U.S. consumer prices were
flat in July for a second straight month and the year-over-year
increase was the smallest in more than 1-1/2 years, giving the
Federal Reserve room to ease policy further to tackle high
Other reports on Wednesday showed home-builder sentiment in
August hit its highest level in more than five years, while
industrial production rose in July. However, a gauge of
manufacturing in New York state contracted this month.
The tame inflation reading leaves the door open to more
monetary stimulus from the U.S. central bank, even though data
on job growth and retail sales have hinted at a bit of a pick-up
in economic activity early in the third quarter.
Economists say growth is still too weak to do much to lower
the nation's uncomfortably high 8.3 percent unemployment rate.
"The bigger worry is high unemployment," said Ryan Sweet, a
senior economist at Moody's Analytics in West Chester
Pennsylvania. "Additional monetary easing is likely, but they
are probably going to wait until later this year, possibly after
the election (in November)".
The flat Consumer Price Index reading confounded economists'
expectations for a 0.2 percent gain.
In the 12 months to July, the CPI rose 1.4 percent, the
smallest gain since November 2010 and down from June's 1.7
percent increase, the Labor Department said.
The core CPI, which strips out food and energy, gained 0.1
percent from June. That was the smallest rise since February and
it broke four straight months of 0.2 percent increases.
In the year to July, the core index, which is closely
watched by the Fed, rose 2.1 percent - the smallest rise in
nearly a year.
INDUSTRIAL PRODUCTION RISES
A second report showed industrial production increased 0.6
percent in July after a 0.1 percent gain in June, offering more
hope the economy was improving after growth slowed in the second
The gain in industrial output, combined with surprisingly
strong retail sales and a pick up in job growth in July, led
some economists to argue the Fed's policy-setting Federal Open
Market Committee probably does not need to launch a third round
of bond purchases this year.
"If the FOMC is waiting to see if recent weak data were
anomalous, this month's round of numbers seems to make the case
that it might be, which in turn is enough to keep the Fed on the
fence," said Chris Low, chief economist at FTN Financial in New
Officials at the Fed meet on Sept. 12-13. Fed Chairman Ben
Bernanke's speech at the central bank's high-profile gathering
in Jackson Hole, Wyoming, in late August could offer clues on
the near-term course of monetary policy.
Bernanke used that forum in 2010 to communicate the Fed's
intention to pursue a second round of so-called quantitative
In the absence of more bad news from Europe and perceptions
of delayed Fed action, U.S. Treasury debt yields rose, extending
a two-week trend. The dollar firmed broadly. Stocks on Wall
Street ended slightly up, with the benchmark Standard & Poor's
500 index closing less than a point away from a four-month high.
The economy has been hit by fears of sharp cuts in
government spending and tax increases in January. A debt crisis
in Europe, which has left the euro area economy with one foot in
a double-dip recession, has also eroded sentiment.
Staples Inc reported lower-than-expected quarterly
results on weak demand in North America, Europe and Australia,
prompting the largest U.S. office supply chain to cut its profit
and sales forecasts for the year.
Current expectations for the year assume slower growth in
the U.S. and continued weakness in Europe, the office supply
UTILITIES, MINES AND FACTORIES BOOST OUTPUT
Industrial output last month was boosted by big gains in
utilities production and mining.
While manufacturing was up 0.5 percent after a similar rise
in June, automaking accounted for the bulk of the increase.
But with auto sales softening against the backdrop of weak
income growth and high unemployment, manufacturers could be
forced to scale back production.
Average weekly earnings were flat in July, when adjusted for
inflation, and were up only 0.6 percent from a year ago.
A third report, from the New York Federal Reserve, showed
factory activity in New York state contracted in August for the
first time since October 2011.
"There are signs that manufacturing activity will continue
to weaken ahead," said Daniel Silver, an economist at JPMorgan
in New York.
"Auto production schedules point to a drop off in production
in August and most of the manufacturing surveys have
deteriorated in recent months. And exports look due to come off
because of struggles with growth abroad."
Last month, inflation was held down by a 0.3 percent drop in
energy prices, which offset a 0.1 percent gain in food prices.
A drought ravaging much of the country could lift food
prices in the coming months, but the impact on inflation should
be modest since food accounts for only 14.2 percent of the CPI.