Price Increases Show U.S. Picking Up as Firings Drop: Economy

The cost of living rose in April and fewer Americans filed claims for jobless benefits last week, showing the world’s largest economy is making progress toward the Federal Reserve’s unemployment and inflation goals.

The consumer-price index increased 0.3 percent last month, the biggest gain since June, Labor Department data showed today in Washington. The number of applications for unemployment insurance payments dropped by 24,000 to 297,000 in the week ended May 10, less than any economist projected in a Bloomberg survey and the least since May 2007, according to other figures.

Improving consumer spending is giving companies such as Chipotle Mexican Grill Inc. the confidence to charge customers more, helping inflation inch up toward the Fed’s target. The drop in firings will need to be accompanied by sustained gains in hiring and wages that will help consumers cope with any additional price increases.

“Growth momentum in the second quarter looks reasonably solid,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and the best CPI forecaster over the past two years, according to Bloomberg data. “There is a little more inflation there than people are giving credit for.”

Other reports showed industrial production and homebuilder sentiment dropped.

Stocks fell and Treasury securities rallied as Wal-Mart Stores Inc. forecast profit that missed estimates, and on news that the European Central Bank was losing its battle to boost growth. Figures today showed the euro-area recovery failed to gather momentum last quarter, as France unexpectedly stalled and economies from Italy to the Netherlands shrank.

Stocks Sink

The Standard & Poor’s 500 Index declined 1.2 percent to 1,865.9 at 12:40 p.m. in New York. The surge in Treasuries brought the yield on the benchmark 10-year note down to 2.50 percent from 2.54 percent late yesterday.

The gain in U.S. consumer prices last month matched the median forecast of 82 economists surveyed by Bloomberg. Estimates ranged from unchanged to a 0.5 percent advance.

Costs were up 2 percent in the past 12 months, the most since July, after a 1.5 percent year-over-year advance in March.

Stripping out volatile food and fuel, the core measure increased 0.2 percent, the same as in March. It climbed 1.8 percent from April 2013, the biggest year-to-year gain since August.

While cheaper goods and services can be good news for consumers, too-low inflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when a slowdown in inflation turns into deflation, or a protracted drop that leads households to delay purchases in anticipation of even lower prices.

Inflation Goal

The Fed’s 2 percent goal is based on the Commerce Department’s inflation gauge that is tied to consumer expenditures. That measure climbed 1.1 percent in the 12 months through March. The report for April comes out May 30.

Among today’s data, “the inflation numbers stand out more than anything else because of the underlying firming evident there,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut.

Today’s report showed food costs climbed 0.4 percent for a third month, the largest gains over a similar period since September 2011. The cost of meat increased 2.9 percent, the most since November 2003. The jump in pork was the biggest since July 1986.

As food prices rise, Denver-based Chipotle is taking steps to pass some of the costs on to customers. The burrito chain may raise prices by up to 6 percent this year, though even that won’t offset all its cost increases, Chief Financial Officer John Hartung said April 29 at an industry conference.

Pricing Power

“In terms of inflation, it’s always going to be a challenge,” said Hartung, adding that the company’s beef prices were up 25 percent in April compared with the fourth quarter. “In every single market we are in, we’ve got pricing power. We’ve got more than we plan to take.”

The increase in prices meant that hourly earnings adjusted for inflation dropped 0.3 percent on average in April after falling 0.1 the prior month, according to another Labor Department report today. Over the past 12 months, real hourly pay declined 0.1 percent.

Economists surveyed by Bloomberg projected the number of jobless claims last week would come in at 320,000, according to the median estimate. Estimates ranged from 303,000 to 330,000.

The four-week average of claims, a less-volatile measure than the weekly figures, dropped to 323,250 last week from 325,250.

Gaining Momentum

“What we know about April and what we’re beginning to learn about May is that the economy is gaining some momentum,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. “I always caution against paying too much attention to one week, but the four-week moving average coming down is a positive sign as we move here into May.”

Employers added 288,000 jobs last month, the biggest increase in payrolls since January 2012, the Labor Department reported May 2. Among them were automakers, which are expanding operations amid rising sales.

Chrysler Group LLC has hired 250 workers at its new factory in Tipton, Indiana, where it will make transmissions for Jeep Cherokees and Chrysler 200 sedans. The carmaker, based in Auburn Hills, Michigan, expects to employ 600 workers at the site by the end of this year and 850 in 2015.

Autos were one of the few bright spots in a report from the Fed that showed industrial production unexpectedly declined in April, held back by a plunge in utilities as temperatures warmed and a broad-based decrease in manufacturing.

Production Falls

Output at factories, mines and utilities fell 0.6 percent after a 0.9 percent gain the prior month that was larger than previously reported. The disappointing result in April may signal a pause after the biggest back-to-back monthly gains in manufacturing since 2010, as factories rebounded from an unusually harsh winter.

“Manufacturing is back at a more sustainable level; it’ll do OK,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who had forecast a 0.5 percent drop in industrial output. “I don’t see the decline as the start of a new downward trend. The gains in February and March exceeded underlying trends.”

Regional Fed surveys from New York and Philadelphia showed manufacturing in their areas grew at a faster pace in May than economists projected.

While the slowdown in manufacturing will probably be short-lived, housing is showing signs of a more sustained slackening following the harsh winter.

Losing Confidence

Confidence among U.S. homebuilders dropped in May to the lowest level in a year, figures from the National Association of Home Builders/Wells Fargo showed today. The group’s builder sentiment gauge fell to 45, the weakest since May 2013, from a revised 46 in April that was lower than initially reported. Readings less than 50 mean fewer respondents report good market conditions.

Still-tight credit conditions, limited availability of lots and falling affordability as home prices rise are probably preventing the market from gaining momentum. Hiring gains may contribute to a pickup in housing demand and help offset some of the headwinds.

“Builder sentiment is becoming more in line with the market reality of a continuing, but modest, recovery,” NAHB Chairman Kevin Kelly, a homebuilder and developer from Wilmington, Delaware, said in a statement. “However, builders expressed some optimism that sales will pick up in the coming months.”

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