Inflation tame, housing starts drop

03/16/2006

WASHINGTON (Reuters) - U.S. inflation was tame in February and home building slowed, while mid-Atlantic factory activity eased this month, according to data on Thursday that led markets to trim bets on how far interest rates will rise.

The consumer price index edged up just 0.1 percent in February as energy prices fell, the Labor Department said. But the core rate, which strips out food and energy costs, also rose just 0.1 percent.

Separately, the Commerce Department said housing starts, completions and permits for future building all dropped in February—pointing to moderation after a five-year boom.

In addition, the Philadelphia Federal Reserve Bank said its gauge of factory activity in the U.S mid-Atlantic region fell to 12.3 in March from 15.4 in February, signaling a sharper slowing than Wall Street had expected.

Analysts said the data pointed to an economic expansion that was neither too hot nor too cold, and said the Federal Reserve may soon be able to wrap up a rate hike campaign it kicked off in June 2004.

Prices for stocks and U.S. government bonds rose on the news, while the dollar slipped. While overall inflation had been expected to edge up 0.1 percent, markets had looked for the non-food and energy core rate to advance 0.2 percent.

“The housing market is cooling off, but not too much, and inflation looks relatively benign,” said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

“It suggests that the economy is on a healthy growth path,” he added. “These numbers look as if there’s no urgent need to raise interest rates much further.”

Fed officials are expected to bump benchmark overnight rates up by a quarter-percentage point to 4.75 percent at their next meeting on March 27-28.

But policy-makers have said the path ahead is less certain and the inflation data led futures markets to scale back bets that rates would hit 5 percent by mid-year.

ENERGY PRICES DOWN

Energy prices decreased a sharp 1.2 percent in February and food prices advanced just 0.1 percent. But even outside those often-volatile areas, price increases were mostly moderate.

The Labor Department said four-fifths of the slight rise in the core index was due to a 0.4 percent gain in shelter costs. A 1 percent drop in clothing prices helped offset that.

Over the past 12 months, consumer prices have risen 3.6 percent, marking a deceleration from the energy-led 4 percent gain posted in the period through January. The 12-month change in the core CPI held steady at 2.1 percent.

The drop in energy prices helped workers keep pace with inflation, although they did not move ahead of it. The department said inflation-adjusted weekly earnings were flat last month and down 0.1 percent over the past year.

The Philadelphia Fed’s factory survey also offered upbeat inflation news as the measure of prices paid by manufacturers fell sharply in March to its lowest level since August 2003.

In its report, the Commerce Department said housing starts dropped 7.9 percent in February to a 2.120 million unit annual pace from an upwardly revised 2.303 million unit in January.

The drop, however, followed a big jump in January due to warm weather and was not as sharp as economists had expected.

Pierre Ellis of Decision Economics said the housing market’s orderly retreat could ease worries over the potential for a big plunge. “There’s no signal that the housing market is really deteriorating. That red flag isn’t there,” he said.

JOB MARKET SOUND

A third report showed new claims for U.S. jobless benefits unexpectedly edged up by 5,000 last week to 309,000, the highest level of the year.

This pushed a four-week moving average of claims, which offers a better view of underlying trends, up by 2,750 to 296,500. While the average is at its highest since mid-January, it still suggests a robust labor market.

In addition, the number of unemployed workers still on the benefit rolls after receiving an initial week of aid tumbled by 49,000 to 2.45 million in the March 4 week, the latest for which figures are available.

The decrease, which was much sharper than economists had expected, brought these so-called continued claims to their lowest level since February 2001, just before the U.S. economy slipped into recession.