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WASHINGTON (Reuters) - U.S. inflation hit a 17-year high last month, underscoring the pressure on Americans who face soaring gasoline and food costs while their job prospects dim and incomes shrink.
A series of bleak reports on Thursday spotlighted the dilemma faced by Federal Reserve policy-makers who have little room left to lower interest rates to help a weak economy and are hoping for price relief to avoid the need to raise rates soon to tamp down inflation.
The Labor Department said its Consumer Price Index, the most commonly used inflation gauge, rose 0.8 percent in July and year-over-year jumped 5.6 percent, the strongest 12-month advance since January 1991 when the first Gulf War was under way.
Costlier energy and food helped push prices up at double the rate economists had expected last month, but since then oil prices have begun to decline. Some analysts said July might mark the worst of inflation pressures, but others noted the price gains hit a wide array of goods from clothing to airfares and cigarettes.
"The battering of consumers continues as prices are rising for just about everything," said Joel Naroff, chief economist for Naroff Economic Advisors in Holland, Pennsylvania. But he predicted the Fed won't lift rates soon because higher rates might further demoralize consumers.
The department also issued figures on real earnings that showed the toll rising prices were taking on consumers. Average hourly earnings, adjusted for inflation, fell 2.5 percent year-over-year in July, the biggest drop since late 1980.
There is some hope that prices for oil and commodities will keep declining and cause what has become a global inflation shock to ease its grip as industrialized economies in Europe and North America slow.
Core consumer prices, which exclude food and energy items, gained 0.3 percent in both June and July and rose 2.5 percent last month on a year-over-year basis, a large enough rise to cause discomfort at the Fed.
"It is certainly above expectations here, but I think we've probably seen, for the near-term anyway, the worst of the inflation readings," said Keith Hembre, chief economist for First American Funds in Minneapolis.
Even the White House conceded that the economy's vigor has been drained and won't reappear for some time, casting a shadow over campaigning for November's presidential elections.
"It will take some time for the economy to turn around but we are confident in the long-term fundamentals and underlying strength of our economy to get us through this period," White House spokeswoman Dana Perino told reporters.
The campaign of Democratic presidential hopeful Barack Obama seized on the surge in inflation to underscore its contention that the economy has been mismanaged. "Families have now lost an entire decade's worth of raises to inflation," said Jason Furman, economic policy director for the Obama campaign.
The dollar rose against other currencies as oil prices eased and stocks also strengthened on optimism that energy prices will keep falling. The Dow Jones industrial average rose 82.97 points to end at 11,615.93.
Bond prices also gained as investors bet the worst of inflation may have passed.
The U.S. job market is also severely strained, adding to the burden on consumers who fuel two-thirds of economic activity through their purchases of goods and services.
In a separate report, the Labor Department said another 450,000 workers filed new claims for jobless benefits last week, down 10,000 from a week earlier but still at levels that are associated with recession.
In fact, a four-week moving average of new filings that is regarded as a better gauge of underlying labor trends climbed to 440,500 from 421,000 the week before.
With U.S. housing markets in the worst slump since the Great Depression, home foreclosure activity soared 55 percent in July from year-earlier levels, according to RealtyTrac, which tracks property in the various stages until it is actually seized by the lender.
Consumers face a squeeze not only on their incomes and from rising costs, but in many cases are seeing accumulated wealth in homes and stocks ebb away.
A report from the National Association of Realtors showed the value of existing U.S. single-family homes in metro areas tumbled 7.6 percent in the second quarter from the comparable period in 2007. The trade group said 115 of 150 metropolitan areas saw prices fall in the quarter.
(Additional reporting by Patrick Rucker in Washington and Ilaina Jonas and Walter Brandimarte in New York; Editing by Leslie Adler)
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