Pain Ahead for Housing Sector,
Economic Activity Slows
WASHINGTON -- U.S. consumer prices accelerated across the board last month, a worrisome sign for Federal Reserve officials who must balance a sharp slowdown in economic activity with stubbornly elevated price pressures.
Meanwhile, home construction rose in January, but the increase was slight and a sign of future groundbreakings fell to the lowest point in 16 years, suggesting more pain ahead for the housing sector.
Still, the inflation data likely won't deter Fed officials from lowering official interest rates again next month, as guarding against recessionary risks remains their top priority. But the figures could limit the size of future rate cuts as the Fed struggles to maintain the public's confidence that it will keep inflation under wraps.
The consumer price index rose 0.4% in January, the Labor Department said Wednesday. The core CPI, which excludes volatile food and energy prices, advanced 0.3%. The data exceeded Wall Street forecasts.
Unrounded, the CPI rose 0.395% last month. The core CPI advanced 0.311% unrounded.
Consumer prices rose 4.3% on a year-over-year basis, matching the biggest increase since September 2005. The core CPI grew a more modest 2.5% compared to January 2007, but that was still the highest annual rate since last March. Over the past three months, core inflation has risen at a 3.1% annual rate. That's well above the top end of the Fed's presumed comfort zone of around 1.5% to 2%. The Fed's preferred gauge, the core price index for personal consumption expenditures, is closer to that range at 2.2% annual growth through December.
Amid growing evidence that housing and credit strains are filtering through the broader economy, the Fed is widely expected to lower the fed funds rate at which banks lend to each other by one-half percentage point to 2.5% at next month's Federal Open Market Committee meeting. The CPI data should at a minimum slam the door on any hopes for a larger cut.
The FOMC has lowered the fed funds rate by 225 basis points since September even as inflation has climbed steadily higher.
In congressional testimony last week, Fed Chairman Ben Bernanke said he expects sluggish economic growth ahead and moderating inflation. But the latter scenario may not unfold even if the economy slows. Import prices have soared in recent months, especially from China, once a source of cheap imports. Oil prices, meanwhile, closed above $100 per barrel for the first time on Tuesday, suggesting risks to both headline and core inflation in coming months.
Energy prices last month increased 0.7% compared to December, according to Wednesday's report. Gasoline prices advanced 1.2%, and electricity prices fell slightly. Food prices rose 0.7% on the month and 4.9% versus one year ago.
Medical care prices, meanwhile, increased 0.5%, while clothing prices were up 0.4%. Transportation prices jumped 0.5% on the month, and airline prices soared 0.8% reflecting the secondary effects of higher energy prices. New vehicle prices were down 0.3%.
Housing, which accounts for 40% of the CPI index, was up a modest 0.2%. Rent increased by 0.3%, as did owners' equivalent rent. Lodging away from home rose 1.1%. Household energy prices fell slightly.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.5% in January, suggesting worker paychecks aren't keeping pace with inflation, which could in turn drag down spending. Average hourly earnings increased 0.2%, and average weekly hours were down 0.3%.
Housing Starts Rose in January
Housing starts increased 0.8% to a seasonally adjusted 1.012 million annual rate, after plummeting 14.8% in December to 1.004 million, the Commerce Department said Wednesday. Originally, Commerce reported December starts 14.2% lower at 1.006 million.
The increase -- the first since October -- was a little smaller than Wall Street expected. The median forecast of economists surveyed by Dow Jones Newswires was a 1.4% climb to an annual rate of 1.020 million. Year over year, housing starts during January were 27.9% below the level of construction in January 2007.
Builders are restrained by plunging sales. The latest government report on new-home sales in the U.S. showed demand in December tumbled by 4.7% to a seasonally adjusted annual rate of 604,000, the lowest pace in 12 years. Year over year, new-home sales were 40.7% lower than the level in December 2006.
A report Tuesday showed builders gained a little confidence about the market this month -- yet still remain wary. The National Association of Home Builders' index for sales of new, single-family homes rose in February, up to 20 from 19 in January, yet far below a reading of 39 in February 2007. The index surveys builders about sales prospects now and in the near term.
"With mortgage financing further constrained and inventories of unsold homes quite high, the near- to medium- term outlook for housing starts is not good," MFR Inc. analyst Joshua Shapiro said in reaction Tuesday to the NAHB report. "The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one."
His words were supported by a key indicator in Wednesday's starts data. Building permits decreased 3.0% to a 1.048 million annual rate in December. Economists had expected a permits rate of 1.040 million. December permits fell 7.1% to 1.080 million. The rate of 1.048 million was the lowest since 984,000 in November 1991.
January single-family housing starts decreased 5.2% to 743,000. Construction of housing with two or more units rose 22.3% to 269,000; within that category, groundbreakings of homes with five or more units -- or multifamily -- were 17.6% higher.
Regionally, housing starts rose 12.0% in the Midwest and 18.9% in the Northeast. Starts fell by 6.2% in the West and 2.9% in the South.
Nationwide, an estimated 64,500 houses were actually started in January, based on figures not seasonally adjusted. An estimated 74,900 building permits were issued last month, also based on unadjusted figures.
Email your comments to rjeditor@dowjones.com.