Consumer Prices Increase Modestly
As Housing Starts Hit 14-Year Low

BRIAN BLACKSTONE & JEFF BATER
Wall Street Journal 17oct2007

WASHINGTON — U.S. consumer prices rose modestly last month, conforming to Federal Reserve expectations and suggesting that while some inflation risks linger, they probably wouldn't stand in the way of any interest-rate reductions needed to keep economic growth on track.

Meanwhile, home builders, their confidence shaken to an all-time low as they watch inventory stay fat, slowed groundbreakings to the weakest pace in 14 years during September.

The consumer price index rose 0.3% in September, the Labor Department said Wednesday, reversing August's 0.1% decline. The core CPI, which excludes volatile food and energy prices, advanced 0.2% for a fourth-straight month.

Unrounded, the CPI rose 0.267% last month. The core CPI advanced 0.220% unrounded. The figures broadly matched Wall Street forecasts.

Consumer prices were up 2.8% from a year ago. The core CPI was up 2.1% compared to the same month a year ago, unchanged from August's rate.

That's near the 2% top end of the Federal Reserve's assumed comfort zone for annual core inflation. The Fed's preferred gauge, the core price index for personal consumption expenditures, is within that range at 1.8% annual growth through August.

Though the CPI will likely rebound in October with oil prices on the rise again, the latest data suggest underlying price pressures remain contained, which should give Fed officials flexibility should they determine more rate cuts are needed to limit the fallout from the housing crunch.

Last month, the Fed lowered the fed funds rate for the first time in more than four years, by 50 basis points to 4.75%, even though officials cautioned that "some inflation risks remain" and that they "will continue to monitor inflation developments carefully."

And there's still reason for concern. Though annual core inflation is just 2.1%, over the past three months it has risen at a 2.5% annualized rate, according to Wednesday's report. And higher oil prices could still filter through to core prices.

Still, Fed officials still seem more worried about the economic fallout from the housing recession than they are about any inflation risks. In a speech Monday, Fed chairman Ben Bernanke said, "overall, the limited data that we have received since the September [Federal Open Market Committee] meeting are consistent with continued moderate increases in consumer prices."

Wednesday's data support that assessment.

Energy prices last month increased 0.3% compared to August, according to Wednesday's report. Gasoline prices rose 0.4%. Electricity prices were up 0.5%. Food prices also increased 0.5%.

Medical care prices, meanwhile, rose 0.3%, as did clothing prices. Housing, which accounts for 40% of the CPI index, was up 0.3%, following August's flat reading. Rent increased by 0.3%, as did owners' equivalent rent. Lodging away from home rose 1%.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, rose 0.1% in September. Average hourly earnings increased 0.4%, and average weekly hours were unchanged.

Housing Starts Plunge

Housing starts plunged 10% to a seasonally adjusted 1.191 million annual rate, after falling 3.2% in August to 1.327 million, the Commerce Department said Wednesday. Originally, Commerce reported August starts 2.6% lower at 1.331 million.

The sharp drop surprised even Wall Street, which expected a decline — but a smaller one. The median forecast of 14 economists surveyed by Dow Jones Newswires was a 4.2% drop to a 1.275 million annual rate. The construction pace of 1.191 million set in September was the lowest since 1.083 million during March 1993. Year-to-year, housing starts were 31% below the level in September 2006.

The National Association of Home Builders said Tuesday its index for sales of new, single-family homes decreased to 18 this month from 20 in September. The reading on the builder confidence gauge was the lowest since the series began in January 1985, the NAHB said. "As has been the case for some time, problems in the mortgage market, soft pricing, and high inventories are hurting builder confidence," wrote Abiel Reinhart, an economist at J.P. Morgan Chase. "Furthermore, cancellation rates appear to have risen last quarter. This suggests that homebuilders will continue to slash housing starts, leading to declining residential investment into next year."

A key indicator suggested an even lower level of groundbreakings in the future, Wednesday's housing starts data showed. Building permits decreased 7.3% to a 1.226 million annual rate in September — the lowest pace since 1.174 million in July 1993. Economists had expected permits to decline 3.5% to a rate of 1.275 million. August permits fell 4.8% to 1.322 million.

September single-family housing starts decreased 1.7% to 963,000. Construction of housing with two or more units decreased 34.3% to 228,000; within that category, groundbreakings of homes with five or more units — or multi-family — were 36.0% lower.

Regionally, housing starts fell by 10.1% in the West, 11.7% in the South and 28.4% in the Midwest. Construction climbed 45.4% in the Northeast.

Nationwide, an estimated 100,700 houses were actually started in September, based on unseasonally adjusted figures. An estimated 94,200 building permits were issued last month, also based on unadjusted figures.

source: 17oct2007