WASHINGTON — U.S. inflation soared to a 17-year-high annual rate in July, a government report showed, led by gains in food, energy, airline fares and apparel.
With energy and commodity prices on the retreat this month and the U.S. dollar strengthening, the report is unlikely to spook Federal Reserve policymakers into raising rates anytime soon as the economy struggles with rising unemployment and soft consumer spending.
Still, a surprising rise in core inflation that excludes food and energy last month will keep officials on edge about the possibility that food and energy prices will become more firmly entrenched in the economy.
The consumer price index rose 0.8% in July, the Labor Department said Thursday. That came on the heels of June’s 1.1% rise, which was the second largest June 1982.
Excluding food and energy, the CPI advanced 0.3% for a second-straight month.
Wall Street economists had expected only a 0.4% rise in the headline and 0.2% core increase, according to a Dow Jones Newswires survey.
Unrounded, the CPI rose 0.818% last month. The core CPI advanced 0.327% unrounded.
Consumer prices jumped 5.6% on a year-over-year basis, the highest rate since January 1991. The core CPI grew a more modest 2.5% compared to July 2007, though that’s still well above the Fed’s long-term goal of 1.5% to 2%. Over the past three months, core inflation rose at a 3.5% annual rate.
Though Fed officials said in a policy statement last week that inflation remains a “significant” concern, they are likely to look past the July data. The Fed is generally expected to keep official interest rates steady into next year, though the rise in core inflation, if repeated in coming months, could put rate hikes later this year back into play.
Many of the forces boosting prices in recent months — particularly high energy and commodity prices and the weaker U.S. dollar — have reversed since mid-July.
In a Dow Jones Newswires interview Wednesday, Minneapolis Fed President Gary Stern said even though the U.S. is “probably…in for a few more sizable increases” in overall prices measures, “assuming we don’t get a resurgence of energy prices, we will see over time a diminution of headline inflation, for sure.”
“As that occurs, I think we’ll also see some diminution of the core,” said Stern, who is considered one of the most vigilant inflation fighters on the Fed.
Energy prices swelled 4% last month, according to Thursday’s report. Gasoline prices spiked 4.1%, and natural gas prices rose 7.4%. Food and beverage prices rose 0.9%.
Medical care prices, meanwhile, increased a modest 0.1%.
But other core items posted sharp gains, a sign that higher headline inflation may have started seeping through the rest of the economy.
Clothing prices, for instance, rose 1.2% compared to June, a 10-year high. Transportation prices soared 1.7% on the month as airline fares swelled 1.3%, reflecting the rise in fuel prices. New vehicle prices advanced a modest 0.2%, reflecting falling demand.
Housing, which accounts for 40% of the CPI index, was up 0.6%. Rent increased 0.3%. Owners’ equivalent rent advanced 0.1%. However lodging away from home rose 0.7%, while home fuel and utilities posted sharp gains.
Services prices rose 0.5%.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.8% in July, suggesting incomes aren’t keeping pace with prices.
That, in turn, could further damp consumer spending which appeared weak in July, according to a retail sales report released Wednesday.
-By Brian Blackstone; Dow Jones Newswires;

WASHINGTON — The prospect of higher taxes on long-term capital gains and dividends may spur a selloff of stocks and other assets by the end of this year, according to wealth-management advisors.

Investors and business owners are on high alert because of a proposal by Sen. Barack Obama, D-Ill., the presumed Democratic presidential nominee, to hike capital gains and dividend tax rates for many investors by between five and 13 percentage points.

Some advisors are telling clients to consider taking gains soon, because tax rates could change next year, particularly if Democrats win the White House and hold on to their congressional majorities.

“For the foreseeable future, you’re not going to get a better chance to move out of appreciated positions, from a tax perspective,” said Hank Alden, an advisor at Everest International Group.

Investment advisors caution that taxes alone should not be the overriding factor in investment decisions and decisions to buy or sell should be made as part of an overall strategy related to one’s portfolio.

But for many investors who have stocks or other holdings that they would otherwise sell in the next several years, the window for doing so at preferential tax rates may be closing.

Obama wants to bump the long-term capital gains and dividend rates up from their current level of 15% to at least 20%, and possibly as high as 28%.

The higher rates would apply only to individuals with income in excess of $200,000 or more, or couples earning more than $250,000.

Jason Furman, economic director for the Obama campaign, said that even for those making more than that amount, “we believe a rate much closer to 20% would be feasible.” That is based on campaign projections that assume that other Obama proposals would also be enacted.

Obama’s opponent, GOP nominee-designate Sen. John McCain, R-Ariz., favors keeping the capital gains and dividend rates at 15% for all investors, regardless of income level.

Screening for “Insiders” Business owners in particular may accelerate plans to sell their firms because of a looming capital gains increase, wealth advisors said.

“A number of family businesses have asked us the question, if we sold later than 2008, how much would my business have to appreciate just to break even,” or to realize as much profit as they would if they sold in 2008, said Jeff Paravano, a partner at the law firm of Baker Hostetler.

“When they see the spreadsheet, and the additional tax, a number of them have decided to sell this year,” Paravano said.

Some investors are even trying to turn a looming tax increase to their advantage by betting that business owners will sell before the tax hike. Investment advisor Robert Willens said some investors are “screening” for companies where founders or their descendants own a large share of the company stock.

Since those “insiders” are likely to have a low basis, they will be more motivated to avoid the tax hit by selling the business before the higher rate kicks in, he said.

“If investors believe a company will be sold at a premium, they may buy in the hope of reaping gains,” said Willens.

Dividend Rate Hike

Companies that pay dividends and their shareholders also are feeling pressure to act ahead of any tax hike.

Some companies may accelerate their fourth-quarter dividend payment from December 2008 from January 2009, according to Paravano.

In anticipation of a higher tax rate on dividends, investors who hold income-producing stock may want to shift to stock that doesn’t pay dividends and roll that into a tax-preferred savings vehicle such as an individual retirement account. That way the entire investment could appreciate without being taxed until the IRA is cashed out.

But they will be limited by annual contribution limits to IRAs, set at $5,000 for 2008, with an additional $1,000 for individuals over 50.

Uncertainty about how quickly Congress might move to raise taxes, and when higher rates will actually take effect, adds to the urgency. While recent GOP-led Congresses have typically made tax changes prospective from the date a bill is signed into law, that has not always been the practice, according to wealth advisors and economists.

Under current law, the 15% rate on capital gains and dividends is in effect until the end of 2010. But many observers expect Congress to act next year to fix the estate tax. Facing budgetary pressures, lawmakers may move at the same time to hike capital gains, dividend and other tax rates that were cut during President George W. Bush’s first term.

Economic Impacts

Rep. Richard Neal, D-Mass., said lawmakers will weigh carefully the effect of tax increases on an economy already burdened by high energy prices and credit woes. “We don’t want to do anything that would slow a recovery. But the deficit is a very stubborn fact,” Neal said in an interview.

Economists disagree over the broad economic impacts of an increase in the capital gains and dividend rates. Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation, has argued that a hike in the capital gains rate to 25% could damp the gross domestic product by as much as 6% over the long term.

But Furman of the Obama campaign said there is evidence that measured increases in tax rates that help reduce the deficit, as Obama is proposing, will not have a sustained negative effect on the economy.

Furman also said other Obama proposals will encourage savings and investment, such as an enhanced saver’s credit for lower-income earners.

“What investors should look at is what’s going to happen to overall economic policy. This is a change in economic strategy to emphasize fiscal responsibility in a way that we haven’t seen,” said Furman.

By Martin Vaughan
Of DOW JONES NEWSWIRES

Interest rates have dropped and it has caused many investors to search for higher income producing investments and is leading many into more complex fixed income products. Not all that appears to be safe is, and those that have read about the credit issues plaguing Wall Street know all to well the negative ramifications misunderstood investments can have on one’s financial present and future.

But we can improve our situations, not by taking on more risk but perhaps understanding the risk in what we own and are contemplating investing in. I would like to go over two simple but yet important concepts in bond investing that many, even savvy stock buyers do not fully understand and therefore under appreciate their importance. It is a bond’s yield to call and yield to maturity. 

Lets start with a simple CD. (Certificate of Deposit) CD’s are time deposits and you agree to invest your money for a certain period of time at a certain interest rate and at the end of that period, at maturity, you receive your money back plus interest earned.

Bonds of all types are available and work in a similar way. You place your money with a government entity or company and receive interest for that period of time and at the end you receive your principal back. There are many types of risks associated with bond investing from credit risk to interest rate risk just to name two but I want to focus on just two parts of the decision on whether a bond is right for you, first Yield to Maturity.

Yield-To-Maturity

When you purchase a bond, the price you pay may be more or less than the maturity value. The values of bonds will fluctuate and on the date of purchase, it could be trading above the maturity or par value, which is called a premium bond, or below it which is called a discount bond. The premium or discount you pay effects the overall return on the investment.

If you paid $950 for a $1000 bond, you paid a discount and the appreciation from $950 to the maturity value of $1000 plus the interest earned needs to be taken into account when evaluating the overall return on the bond. You not only earned the interest, but made $50.

The same holds true for a premium bond. If you paid $1050 for a $1000 bond, you paid a premium. The difference between what you paid over the maturity value would need to be subtracted to find out your overall return. In this case you earned interest but lost $50 on the investment.

When evaluating a bond you may want to invest in, you do not need to figure all this out. Your advisor or company you deal with will be able to tell you the yield to maturity. If a discount bond had a yield to maturity of 6%, and a premium bond had a yield to maturity of 6.1%, all other factors remaining equal, then the premium bond would be a better buy. The total return was better even though I paid more for it.

So it’s not just the interest rate the bond pays, it is also the price you are able to purchase it at that makes a difference.

Yield to Call

The yield to call is determined in the same way as the yield to maturity except the call date is used instead of the maturity date. Most bonds today have call provision which means the issuing organization has the right to redeem, call away (give your money back) earlier than the stated maturity date. They will most likely do this if they can turn around and borrow at a lower rate than they are paying you. Just like you might refinance your home mortgage at a lower rate.

The effects of a discount or premium paid are magnified since the gain or loss, in this case of $50.00 is compressed over a shorter period. Making $50.00 over a shorter period of time is a good thing, losing the $50.00 premium over a shorter period of time is a bad thing and hurts your overall total return.

The interest rate you receive may increase the chances of a call. If a bond has a high interest rate and the current rates are much less, the bond has a greater risk of being called away and therefore a premium bond holds more risks under this environment.

Fortunately, the yield to call just like the yield to maturity is readily available to you from your advisor. When investing in bonds, the price you pay can have a dramatic effect on your return. The higher the yield to maturity on a premium bond does not equate to a better investment if the chances of a call are higher.

Knowledge is king in bond land, don’t be lead by the nose, know what you are buying and understand the risks first, reaching for a higher yield and ignoring the risks could result is a major loss of principal. On Wall Street, there is no free lunch.

For more information on bond investing, please log onto www.livelongliverich.com and don’t forget to sign up for the free newsletter.

Well, perhaps not new but for many unfamiliar. There are CD’s that are available that enable investors to capture higher interest rates than just buying a plain vanilla CD and at a time when rates are down, these structures can prove to be a best of breed when it comes to income and safety.

C.D.’s are time deposits, i.e. you agree to put your funds on deposit with a bank for a stated period of time, during which your funds earn interest at an agreed upon rate. In general, the longer you are willing to leave your money in a C.D., the higher the rate of interest you will receive.

C.D.’s purchased directly from banks are secured by FDIC insurance in amounts up to $100,000 per investor, 250,000 for retirement plans. They typically pay a stated interest rate until maturity. An investor wishing to withdrawal the deposit before maturity will usually be subject to a penalty.

Many securities firms also offer C.D.’s in the form of brokered C.D.’s. They are similar to C.D. s issued directly by banks, in that they carry FDIC insurance of $100,000 per investor and are available in a variety of maturities. They differ because they can be bought and sold prior to maturity which makes them more liquid. The price will fluctuate and could be more or less than what you paid or the maturity value.

Another benefit to brokered C.D.’s is that they usually include a “survivor’s option” which is very important to consider. Although restrictions on this provision may exist, it usually provides for redemption of the C.D. at the maturity value upon the death of the owner, even if this happens well before maturity. This can be an important estate planning tool especially for an older individual who wishes to capture the higher rates associated with longer term C.D.’s but not tie up the money for his/her heirs in their estate. Most of my older clients love this structure and I do too.

Step Up C.D.’s

Step-up CDs feature interest rates that increase or step up to a pre-determined level on a specific time schedule as they approach maturity. The interest rate on these CDs is usually fixed for a period of time, which is followed by a step up to another fixed rate. These steps may occur more than once before a CD reaches maturity.

Let’s look at an example:

Consider a 10 year CD. The first two years it pays a 4 percent interest rate. The next two a five percent interest rate, the next two a six percent interest rate and so on.

Years 1 and 2  4%
Years 3 and 4  5%
Years 5 and 6  6%
Years 7 and 8  7%
Years 9 and 10 8%

This structure usually pays a higher rate that on a short term security and steps up at a moderate rate as the CD moves towards maturity. The downside is that most of these issues are callable on the date of the first step-up. At that point if the bank does not want to pay the higher stepped-up rate it can redeem the bond. It still remains however an attractive structure for those looking for income.

As you can see, CD’s have various structures that offer a higher income stream while still retaining the FDIC insurance and the safety factor many investors seek in their investments. The next time you look to invest, check out the rates on Step-Up and Brokered CD’s. The rates are usually competitive and the safety factor many seek.

For more informations log onto www.livelongliverich.com and don’t forget to sign up for the free newsletter.