Inflation gathers steam as housing slides
WASHINGTON (Reuters) - A steady rise in U.S. consumer prices in January pointed to persistent inflation pressures despite fresh signs on Wednesday that the declining housing sector remains a drag on the economy.
The Consumer Price Index, a broadly based gauge of U.S. inflation, rose a faster-than-forecast 0.4 percent for a second straight month and was up a steep 4.3 percent in the 12 months through January, a Labor Department report showed.
Separately, the Commerce Department said permits for new building fell 3 percent last month to the lowest in 16 years while starts on new homes rose only slightly.
"It is by no means self-evident that a slowdown in the U.S. economy will hold down inflationary expectations at a time of rising commodity costs," said economist Roger Kubarych of UniCredit Global Research in New York.
The Federal Reserve later lowered its estimate for U.S. economic growth in 2008 to a range of 1.3 percent to 2 percent from 1.8 to 2.5 percent that it had foreseen last November.
It cited "an especially worrisome possibility" that economic weakness may feed on a contraction in credit and thus further undermine growth.
Financial services firm UBS, in a research report issued on Wednesday, said it considered that a mild recession already has begun in the United States.
IT'S HERE, NOW
"It's not coming, it's here," UBS said.
The Fed, the U.S. central bank, has been aggressively cutting the benchmark federal funds interest rate, bringing it down to 3 percent from 5.25 percent in mid-September to bolster the economy against a housing downturn and a pinch in credit.
Stock prices fell after the unfavorable prices data was published but recovered later on the back of stronger prices for technology stocks after computer maker Hewlett-Packard Co reported heftier profits.
The Dow Jones industrial average added 90.04 points or 0.73 percent to end at 12,427.26 while the high-tech-laden Nasdaq Composite Index rose 20.90 points or 0.91 percent to end at 2,327.10.
Bond prices were mixed. Investors sought safe haven in U.S. Treasuries in the morning but returned to equities in the afternoon when computer stocks began to rise.
The bellwether 10-year Treasury note rose 3/32 in price and yielded 3.90 percent while the two-year note was down 4/32 and yielded 2.14 percent. Bond prices and yields move inversely.
In a speech in Kirksville, Missouri, St. Louis Fed President William Poole said that while the U.S. central bank must try to nurture growth, it should not do so at the cost of permitting inflation to get out of control and wreak havoc. Continued...
