WASHINGTON (AP) - Consumer inflation shot up in July as rising gasoline prices pinched drivers' wallets from coast to coast. But the rest of the economy kept pushing forward with industrial output rising and housing construction staying at a supercharged level. A flurry of reports Tuesday depicted a country that so far is withstanding this year's surge in energy prices, helped by a continued boom in housing activity, the economy's strongest sector. Consumer prices jumped 0.5 percent in July, the biggest increase in three months, but the price pressures came almost entirely from surging costs for gasoline and other energy products. Outside of the volatile food and energy areas, consumer prices rose a much more modest 0.1 percent in July, reflecting in part the biggest drop in new car prices in 30 years. Meanwhile, the Commerce Department reported that construction of new homes and apartments totaled 2.042 million units in July. While that was down a slight 0.1 percent from June, it marked the eighth month in the past 10 that housing construction has been above the 2-million mark, reflecting frenzied activity on the part of builders to keep up with record demand. Even manufacturing, the weakest part of the economy, managed to post a 0.1 percent rise in industrial production in July, according to a Federal Reserve report. Analysts said the gain would have been much stronger except for a drop in mining output reflecting hurricane-related shutdowns of oil platforms in the Gulf of Mexico, and retooling in the auto industry. "Housing, the strongest part of the economy, is still booming, and manufacturing, the weakest part, should gain strength in coming months," said Mark Zandi, chief economist at Economy.com. "Put it all together and it paints a pretty economic picture of solid growth and low inflation." However, the energy price increases had investors worried. On Wall Street, stocks tumbled after Wal-Mart Stores said that higher gasoline prices had curbed consumer spending. The Dow Jones industrial average dropped 120.93 points to close at 10,513.45. The 0.5 percent increase in consumer prices followed two months of price calm, reflecting falling energy costs. However, with oil prices hitting new record highs and gasoline costs surging, energy prices came back with a vengeance in July, jumping by 3.8 percent. Gasoline prices shot up by 6.1 percent, the biggest increase since April. Analysts said motorists should be braced for another big increase in August since the government reported Monday that pump prices rose nationwide to $2.55 per gallon last week, up 18 cents in a week, the biggest one-month increase in the 15 years of the Energy Department survey. The Labor Department's CPI report showed that rising prices for gasoline, home heating oil and natural gas have not spilled over into high inflation generally. "Energy is a killer, but if you don't use it, you're not seeing a whole lot of inflation," said Joel Naroff, chief economist at Naroff Economic Advisors, a consulting firm in Holland, Pa. Outside of food and energy, so-called core prices rose by a tiny 0.1 percent in July, the third straight monthly increase of this small size. New car prices, given the attractive incentives auto makers offered last month, actually declined by 1 percent, the biggest drop in this category since January 1975. So far this year, inflation is rising at an annual rate of 3.5 percent, little changed from last year's 3.3 percent gain, while core inflation, excluding food and energy, is up just 2.2 percent. Davis Wyss, chief economist at Standard & Poor's in New York, said one reason energy has not had much impact on the overall inflation rate is that it is being offset in part by cheap imports of other foreign goods and the amount of energy needed to keep the country running is less now than during the oil shocks of the 1970s and 1980s. "Energy just isn't as big relative to the economy as it was 25 years ago," Wyss said. He predicted the economy will grow at an annual rate of 4.5 percent in the current quarter, far above the 3.2 percent April-June increase, as businesses increase production to restock depleted inventories and home construction remains at high levels. David Seiders, chief economist for the National Association of Home Builders, said he looked for construction activity to remain strong for the next few months as builders struggle to meet demand. "The market is still very, very strong," he said. For July, housing construction was up in all parts of the country except the South, which had a decline of 5.4 percent.
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