Consumer prices jump in May

Firms gain ground, housing stabilizes in economic pickup

Shoppers browse for souvenirs at the Main Market in San Antonio earlier this month. “Inflation in the U.S. is in a sweet spot,” one analyst said Tuesday.
Shoppers browse for souvenirs at the Main Market in San Antonio earlier this month. “Inflation in the U.S. is in a sweet spot,” one analyst said Tuesday.

Consumer prices rose in May by the most in more than a year, showing U.S. companies are gaining some pricing power as the economy strengthens, and the homebuilding industry stabilized after a first-quarter swoon.

The cost of living increased 0.4 percent, the biggest advance since February 2013, according to Labor Department data released Tuesday in Washington. Other figures showed builders broke ground on 1 million homes at an annualized rate after recording 1.07 million in April, the best two-month reading since late last year.

The reports are seen as welcome news to Federal Reserve policymakers meeting Tuesday and today because the pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth. Central bankers are projected to continue scaling back their bond-buying program, while an increase in interest rates is expected to be delayed until well into 2015.

"Inflation in the U.S. is in a sweet spot -- it's not too hot, it's not too cold," said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who projected a 0.3 percent increase in consumer prices. "The disinflationary stress that we've had over the past two or three years has effectively ended. That's the big story here."

Last month's increase in consumer prices exceeded all estimates in a Bloomberg survey, which ranged from no change to a 0.3 percent advance. The median forecast called for a 0.2 percent increase.

Costs rose 2.1 percent over the past 12 months, the most since the year that ended October 2012, after a 2 percent gain in April.

The number of housing starts last month was in line with the median forecast of economists surveyed by Bloomberg, which projected a 1.03 million reading. April's rate was the strongest since November, the report from the Commerce Department showed.

Permits, a proxy for future construction, decreased 6.4 percent to a 991,000 annualized rate. They were projected to fall to a 1.05 million pace, according to the survey median.

The drop was heaviest in multifamily projects, which tend to be volatile from month to month. Applications to begin work on single-family homes, which make up the biggest share of the market, rose 3.7 percent to the highest rate since November.

A strengthening job market and a retreat in mortgage costs in recent weeks are helping support residential real estate after a lull in building earlier this year, when frigid weather prevented builders from breaking ground. Faster sales will prompt developers to step up construction, given supplies of homes on the market remain lean and property values are rising.

"Housing is going to continue to gather steam as we go through the balance of the year," said Brian Jones, a senior U.S. economist at Societe Generale in New York, who forecast 1 million starts. "If housing is better, more people are working. If more people are working, you have knock-on effects on other demand components. It's another oar in the water for the U.S. economy."

The Labor Department's inflation report showed that stripping out volatile food and fuel, the so-called core measure increased 0.3 percent, the most since August 2011, after a 0.2 percent gain the prior month. Economists had forecast a 0.2 percent advance, according to the survey median.

The core index increased 2 percent from the same month in 2013 after a 1.8 percent gain in April.

The Fed's 2 percent inflation goal is based on the Commerce Department's inflation gauge that is tied to consumer spending. That measure climbed 1.6 percent in the 12 months through April, and May data are scheduled for release June 26.

Fed officials, led by Chairman Janet Yellen, said again at their April meeting that long-term inflation expectations remain stable. In April, the Fed pared its monthly asset buying to $45 billion, its fourth straight $10 billion cut, and said further reductions in "measured steps" are likely.

The pickup in inflation "is something that they should welcome," said Michael Pond, New York-based head of global inflation market strategy at Barclays Plc. "The underlying trend is definitely showing a modest pickup" in pricing power, he said.

Energy costs increased 0.9 percent from a month earlier, while food prices rose 0.5 percent, the most since August 2011, Tuesday's Labor Department report showed.

The May increase in prices meant that hourly earnings adjusted for inflation dropped 0.2 percent for a second month, according to another Labor Department report Tuesday. Over the past 12 months, real hourly pay has declined 0.1 percent.

The Consumer Price Index is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

Wholesale prices decreased 0.2 percent in May, data showed last week. Import prices rose 0.1 percent last month after a 0.5 percent decline in April, according to a separate report released Thursday.

Information for this article was contributed by Chris Middleton of Bloomberg News.

Business on 06/18/2014

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