The cost of living in the U.S. rose less than forecast in August, a sign it will take time for inflation to reach the goal of Federal Reserve policy makers as they consider trimming stimulus designed to bolster the economy.
The consumer-price index increased 0.1 percent, the least in three months, after a 0.2 percent gain in July, Labor Department figures showed today in Washington. The core measure, which strips out food and fuel, also rose 0.1 percent. Another report showed homebuilder confidence held this month at the highest level since 2005.
Fed policy makers meeting today and tomorrow will debate whether the economy, fueled in part by resilient demand for homes and autos, is strong enough to warrant a slowdown in the pace of monthly bond purchases. Central bankers have said they are also watching prices to ensure the U.S. doesn’t slip into a prolonged period of disinflation that threatens the expansion.
Prices are “still pretty benign, but I think from the Fed’s point of view they’re moving in the right direction,” said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut, who correctly projected the CPI gain. “There’s still plenty of slack in the labor market, we don’t have very much in terms of wage inflation, so it’s not surprising that you’re seeing very little pricing power.”
Fed policy makers tomorrow will probably announce they’re lowering the monthly pace of bond purchases by $10 billion, to $75 billion, according to the median response of 34 economists in a Bloomberg survey on Sept. 6. That’s down from expectations of a $20 billion reduction in a July survey.
Stocks rose, sending the Standard & Poor’s 500 Index toward a record high, as Microsoft Corp. announced a $40 billion buyback and raised its quarterly dividend. The S&P 500 (SPX) climbed 0.4 percent to 1,704.76 at the close in New York. The benchmark index is less than five points below its all-time high of 1,709.67 reached on Aug. 2.
The National Association of Home Builders/Wells Fargo index of homebuilder sentiment held at 58 this month, matching August’s reading as the strongest since November 2005, a report from the Washington-based group showed. Readings greater than 50 mean more builders view conditions as good than poor.
Companies including Hovnanian Enterprises Inc. have said the recent rise in mortgage rates will temporarily restrain the housing recovery rather than end it. While work orders from the past few months will probably sustain construction gains, faster growth in hiring and wages are needed to spur bigger increases in demand. A measure of buyer traffic increased to the highest since October 2005.
As the strength in housing helps propel the U.S. economy, overseas markets are on the mend. German investor confidence climbed this month to the highest level since April 2010, a report from the ZEW Center for European Economic Research in Mannheim showed today.
The increase in U.S. consumer prices last month was led by medical care, prescription drugs, rents and tobacco. Declines in gas utility service, gasoline and airfares limited the advance.
The median forecast in a Bloomberg survey of 87 economists called for a 0.2 percent gain in the August CPI. Estimates ranged from no change to a gain of 0.3 percent.
Consumer prices increased 1.5 percent in the 12 months ended in August after a 2 percent year-over-year gain the prior month.
The core CPI climbed 1.8 percent from August 2012, following a 1.7 percent advance in the prior 12-month period and a 1.6 percent increase in June. Year-over-year gains had been slowing since April 2012, when prices climbed 2.3 percent.
For some companies, higher raw materials costs will keep inflation from slowing further.
“You’re seeing cost-push inflation work its way through the supply chain in apparel,” Richard Noll, chief executive officer of Hanesbrands Inc. (HBI), the Winston Salem, North Carolina-based maker of Hanes underwear and Playtex bras, said at a conference on Sept. 11. “We’re going to be in a moderately inflationary environment.”
Fed policy makers have warned of the risks of prolonged inflation below their 2 percent target. Fed Chairman Ben S. Bernanke has said low inflation could cause the recovery to bog down by inhibiting capital investment and increasing the risk of “outright deflation,” a broad-based decline in prices.
“Very low inflation poses risks to economic performance,” he told lawmakers July 17. “We will monitor this situation closely.”
Today’s report showed medical care services climbed in August by the most since September 2010. Owners’ equivalent rent of primary residences, a measure of what homeowners would charge tenants if they decided to rent their properties, posted the biggest gain since November 2008.
At the same time, the increase in the consumer-price gauge was held back by the biggest decline in airfares since November 2008. The cost of gas services provided by utilities decreased 2.3 percent, while gasoline prices fell 0.1 percent.
With inflation under control, paychecks are barely rising. Hourly earnings adjusted for inflation increased 0.1 percent in August, and were up 0.7 percent over the past 12 months, separate figures from the Labor Department showed today.
McDonald’s Corp. (MCD) is among companies limiting price increases as it strives to lure customers. The world’s largest restaurant chain, based in Oak Brook, Illinois, is also working to draw cash-strapped Americans with new products after its U.S. same-store sales climbed less than analysts projected.
“It is critical to maintain our value proposition by keeping price increases at or below key inflation indices,” Peter Bensen, chief financial officer, said on a Sept. 10 earnings call. “With projected 2013 food away from home inflation of 2.5 percent to 3.5 percent, we want to maintain pricing flexibility as we balance future price increases with our desire to continue to grow traffic and market share.”
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