Consumer Prices Rising as U.S. Housing Stabilizes: Economy

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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 today in Washington. Other figures showed builders broke ground on 1 million homes at an annualized rate after 1.07 million in April, the best two-month reading since late 2013.

The reports will be welcome news to Federal Reserve policy makers meeting today and tomorrow as 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 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.”

Treasury securities dropped, pushing the yield on the benchmark 10-year note up to 2.65 percent at 4:18 p.m. in New York, compared with 2.60 percent at the close yesterday. The Standard & Poor’s 500 Index rose 0.2 percent to close at 1,941.99.

Survey Results

Last month’s increase in consumer prices exceeded all estimates in the 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 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 that projected a 1.03 million reading. April’s rate was the strongest since November, the report from the Commerce Department showed.

Permits (NHSPATOT), 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.

Multifamily Permits

The drop was all centered 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 since November.

A strengthening job market and a retreat in mortgage costs in recent weeks are helping support residential real estate following a lull in building in early 2014 when frigid temperatures 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.”

Core Prices

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, following 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 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.

Officials led by Chair Janet Yellen reiterated 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, Food

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

Companies including natural and organic food producer Annie’s Inc. are taking steps to pass some of the expenses on to customers as input costs rise.

“We expect further upward price pressure in organic wheat, dairy and other commodities in fiscal 2015 and we plan to implement appropriate price increases,” John Foraker, the Berkeley, California-based company’s chief executive officer, said in a May 29 earnings call.

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 today. Over the past 12 months, real hourly pay declined 0.1 percent.

The CPI 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 following a 0.5 percent decline in April, according to a separate report released June 12.

To contact the reporters on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net Chris Wellisz

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