INSTANT VIEW: Consumer prices rose in July

NEW YORK (Reuters) - U.S. consumer prices rose at twice the rate expected in July to post the fastest rate of year-over-year growth in 17-1/2 years, pushed up by costlier energy and food, a government report on Thursday showed.

The number of U.S. workers filing new claims for jobless benefits fell by 10,000 last week but remained at levels that show labor markets under severe strain.

KEY POINTS:

CPI * The Labor Department said the Consumer Price Index, considered a key gauge of inflation, rose 0.8 percent in July after a 1.1 percent jump in June.

* That was far above the 0.4 percent gain that economists polled by Reuters had forecast for July.

* Prices were up 5.6 percent from a year ago, the sharpest year-over-year rise since 5.7 percent in January 1991. That was also well above the 5.1 percent increase that economists had forecast.

* Energy prices rose 4 percent in July after a 6.6 percent June gain and were up 29.3 percent on a year-over-year basis. Food costs rose 0.9 percent following a 0.8 percent June increase and put food costs 6 percent higher than a year ago.

JOBLESS CLAIMS

* The Labor Department said on Thursday initial claims for state unemployment insurance benefits dipped to a seasonally adjusted 450,000 in the week ended August 9 from an upwardly revised 460,000 in the prior week. That was still well above the 432,000 claims level that economists polled by Reuters had forecast.

* The last time that weekly claims fell was at the start of July.

* But a four-week moving average of new jobless claims, regarded as a better gauge of underlying labor trends because it irons out week-to-week volatility, climbed to 440,500 last week from 421,000 the week before. That was the highest reading in more than six years, since it hit 445,500 in April 2002.

COMMENTS:

KEITH HEMBRE, CHIEF ECONOMIST, FIRST AMERICAN FUNDS,

MINNEAPOLIS:

"I think this will be the peak reading (in inflation). I'm surprised that the core index is up as much as it was and definitely surprised that some of the components of the core index. I think there are some very anomalous readings within the core index that are very much likely to reverse out in the coming months.

"It is certainly above expectations here, but I think we've probably seen, for the near-term anyway, the worse of the inflation readings.

"The way I judge the market reaction is that they are certainly looking at those increases as well but if you are focused more on the forward looking drivers of inflation I think we have probably seen, for the near term anyway, a peak in the acceleration in the inflation numbers."

GARY THAYER, SENIOR ECONOMIST, WACHOVIA SECURITIES, ST. LOUIS,

MISSOURI:

"Bond prices slipped because the inflation numbers were higher than expected. Many people were probably anticipating that some of the decline in commodity prices that we've seen would show up in this number, but it may take a month or two for lower commodity prices to be fully reflected at the consumer level.

"If we don't get an unexpected shock that pushes commodity prices back up, this might be the worst inflation news that we'll get for a while. If inflation moderates along with the commodity markets, monetary policymakers will probably focus more on the housing problems and worry less about inflation. That will allow the Fed to hold interest rates steady into the early part of next year."

BOB LYNCH, HEAD OF NORTH AMERICA FX STRATEGY, HSBC, NEW YORK:

"Higher inflation is positive for short-term interest rates in general, but an inflation-driven rise in yields wouldn't necessarily be good for the dollar in the medium term. Second thing, we have jobless claims, which remain high, and this still reflects softness in the labor market and that's why we're seeing the dollar slip a little bit."

DANA SAPORTA, ECONOMIST, DRESDNER KLEINWORT SECURITIES, NEW

YORK:

"What we didn't catch in our forecast is the increase in tobacco which explained why the core came in above forecast. The headline is still a lot of energy and seasonal adjustments. Food continues to be a problem too.

"The overall picture is that inflation is still on the Fed's radar screen. We don't expect the Fed to change rate policy anytime soon."

JOHN SPINELLO, CHIEF FIXED-INCOME TECHNICAL STRATEGIST,

JEFFERIES & CO, NEW YORK:

"The core CPI number rose 0.3 percent and the headline number... was pretty ugly for those who look at the headline number so the market sold off. Jobless claims dropped a little bit, but not as much as expected. Claims were a sidebar to the inflation number."

MARKET REACTION:

STOCKS: U.S. equity index futures turn negative

BONDS: U.S. Treasury prices fall DOLLAR: U.S. dollar falls versus the euro

RATE FUTURES: Fed fund futures edge higher, suggesting about a 16 percent chance of September FOMC rate hike.