July 17, 2015 / 12:40 PM / 2 years ago

U.S. inflation, housing data bolster rate hike argument

Shoppers are reflected in a window as they walk though Times Square in New York November 30, 2014.Carlo Allegri

WASHINGTON (Reuters) - U.S. consumer prices rose for a fifth straight month in June as the cost of gasoline and a range of other goods increased, further signs of firming inflation that strengthen the case for an interest rate hike this year.

Other data on Friday suggested the economy could support a tightening of monetary policy. Housing starts surged in June and building permits soared to a near eight-year high. Federal Reserve Chair Janet Yellen this week affirmed the U.S. central bank was keen to start raising interest rates later this year.

"The barriers to a Fed hike are starting to crumble. The wait for the first rate hike may not be that much longer," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The Labor Department said its Consumer Price Index rose 0.3 percent last month after increasing 0.4 percent in May. Last month's increase pushed the year-on-year CPI rate into positive territory for the first time since December.

The energy-driven disinflationary trend appears to have run its course, with producer prices rising in June for a second straight month.

In a separate report, the Commerce Department said groundbreaking for new homes increased 9.8 percent to a seasonally adjusted annual pace of 1.17 million units in June. Permits for future home construction increased 7.4 percent to a 1.34 million-unit rate, the highest level since July 2007.

The acceleration in housing activity should ease concerns that economic growth slowed at the end of the second quarter after a surprise drop in retail sales in June and continued weakness in manufacturing.

"We are seeing strong household formation by the millennial cohort, which is putting pressure on many local housing markets," said Peter Ciganik, managing director at real estate investment firm GTIS Partners in New York.

Economists anticipate that the housing market will mitigate the drag on the economy from the struggling factory sector.

Firming price pressures, together with a tightening labor market and strengthening housing could give the Fed confidence that inflation will gradually rise toward its 2 percent target.

The Fed has kept its short-term interest rate near zero for more than six years. Most economists believe the Fed will pull the trigger on rates in September.

A worker labors on a housing project on Mission Street in the South of Market neighborhood in San Francisco, California April 29, 2014.Robert Galbraith

The dollar rose against a basket currencies on the data, while prices for shorter-dated U.S. Treasuries fell. Stocks on Wall Street were trading mostly lower, though strong quarterly results from Google (GOOGL.O) boosted technology shares.

SENTIMENT EBBS

While a third report showed consumer sentiment ebbed in early July on international concerns, morale remained at lofty levels, which bodes well for consumer spending.

The prices of a gallon of gas are shown at a service station in Sausalito, California May 13, 2015.Robert Galbraith

The University of Michigan's consumer sentiment index fell to 93.3 from a reading of 96.1 in June. The July reading was the eighth straight month above 90.0.

The acceleration in inflation in June was broad-based, with a steep increase in egg prices. In the 12 months through June, the CPI edged up 0.1 percent after being unchanged in May.

The so-called core CPI, which strips out food and energy costs, increased 0.2 percent last month after rising 0.1 percent in May. In the 12 months through June, the core CPI rose 1.8 percent after May's 1.7 percent increase. An inflation measure tracked by the Fed is running well below its 2 percent target.

"Inflation doesn't have to be at their target to begin normalizing interest rates, particularly as some Fed officials are concerned that long-term inflation expectations could become dislodged if the central bank is too complacent," said Sohini Chowdhury, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Last month, gasoline prices increased 3.4 percent after jumping 10.4 percent in May. Food prices rose 0.3 percent, the largest increase since September 2014, as an outbreak of bird flu in some parts of the country caused a shortage of eggs. Egg prices surged 18.3 percent, the biggest gain since August 1973.

Elsewhere, the index for rent increased 0.4 percent, the largest rise since August 2013.

With the residential vacancy rate near a 22-year low as a firming labor market boosts household formation, shelter costs are likely to continue rising.

There were also increases in the cost of recreation, new motor vehicles, tobacco, airline fares and personal care. These offset declines in the prices for apparel, medical care, used cars and trucks and household furnishings.

Reporting by Lucia Mutikani; Editing by Andrea Ricci

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