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Core Inflation in Check, but Consumers Became Wary

Economic data released Friday showed inflation under control in July while U.S. factories were busier than forecast, portraying a resilient economy in little need of an interest rate cut.

But other reports showed U.S. consumer sentiment worsened in August from July, while the outlook for economic growth weakened.

However, markets and analysts mostly shrugged off the data, focusing instead on a speech by Fed chief Ben Bernanke and word that President Bush would announce plans to help homeowners at risk of losing their homes due to the subprime mortgage crisis.

Bernanke said the Fed will take the necessary steps to shelter the economy from turmoil in financial markets but will not bail out investors who made mistakes.

"The committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," Bernanke said in a speech to a symposium organized by the Kansas City Federal Reserve.

President Bush was to propose a series of steps to address the mortgage crisis after weeks of turmoil in financial markets, the White House said.

The efforts Bush will outline "are designed to address some of the current problems we are seeing in the housing market and also include reforms to prevent these sorts of problems from arising again in the future," White House Spokesman Tony Snow said.

Wall Street stocks climbed on investor hopes that Bush's plan would help to loosen credit conditions that have rattled financial markets.

July Data Good, August Worrisome

Core U.S. consumer prices edged up less than expected in July while income and spending rose smartly and factory orders far exceeded forecasts, according to government reports.

A core inflation index from the Commerce Department rose 0.1 percent in July, holding the year-on-year increase in the Federal Reserve's favorite inflation gauge to 1.9 percent for the second straight month.

Analysts polled by Reuters were expecting the core PCE price index, which excludes often-volatile food and fuel costs, to gain 0.2 percent after a June rise of 0.2 percent that was originally reported at 0.1 percent.

"It doesn't seem like pricing pressures are moving out of control," said George Davis, chief technical strategist at RBC Capital Markets in Toronto.

Although analysts said the benign inflation data provides some latitude for the Fed to cut the federal funds rate to forestall a credit crunch, the other data suggested that the economy may not need such stimulus.

"Ben Bernanke continues to emphasize that, away from housing, the economy continues to expand at a moderate pace," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

On a more worrisome note, a Reuters/University of Michigan survey of consumer sentiment index fell to the lowest level in 12 months as households grew uncertain about economic prospects due to high food and fuel prices and recent financial market turmoil.

Another gauge of future U.S. economic growth fell to a 27-week low in the most recent week due to higher jobless claims, lower commodity prices and softer housing activity, according to The Economic Cycle Research Institute, an independent analysis firm.

Personal Income Rises

The Commerce Department said personal income rose a bigger-than-expected 0.5 percent in July, the largest month-on-month gain since a 0.8 percent rise in March.

Personal spending rose 0.4 percent in July after an upwardly adjusted 0.2 percent increase for June. Analysts polled by Reuters were expecting both personal income and personal spending to rise 0.3 percent.

Overall prices, as measured by the government's personal consumption expenditures index, also rose 0.1 percent in July after an upwardly revised 0.2 percent gain in June.

July's 1.9 percent rise in the core PCE index, the Federal Reserve's favorite inflation gauge, was the lowest reading since a 1.9 percent rise in March 2004 and was within the Fed's normal comfort range of between one and two percent.

Robert MacIntosh, chief economist, Eaton Vance Management in Boston, said the spending and income growth signals a resilient economy that may not need a rate cut.

"The consumer is still alive and well and inflation is in good shape," he said.

Factory Orders Jump

New orders at U.S. factories jumped by a much bigger-than-expected 3.7 percent in July and a strong 2.4 percent without the volatile transportation component, the Commerce Department said.

Analysts polled by Reuters expected orders to rise 0.8 percent in July after an upwardly revised 1.0 percent gain in June, originally reported as a 0.6 percent rise.

July non-defense capital goods orders excluding aircraft, viewed as a good proxy for business spending, rose 1.7 percent, slightly less than the 2.2 percent July gain reported on Aug. 24, the Commerce Department said.

Transportation equipment orders, a volatile category whose monthly performance is heavily influenced by commercial aircraft orders, rose 11.0 percent.

Excluding transportation, orders rose 2.4 percent in July after a revised 0.4 percent fall in June. Boosting the figure was an 8.2 percent increase in orders for primary metals, the largest since July 2004, a 7.0 percent increase in orders for computers and electronic components and a 5.6 percent increase in orders for machine.

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