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US inflation at 27-year high as home building dives
Posted: 19 August 2008 2214 hrs

 
 
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WASHINGTON: A pair of troubling US economic reports released on Tuesday showed wholesale prices had spiked dramatically in the past year while new home construction slumped heavily last month.

The two separate government surveys, one of which showed wholesale prices had surged by their largest margin in 27 years in the year to July, dragged down US financial markets as investors worried about already fragile economic growth.

The Labour Department reported that its producer price index (PPI), a key gauge of inflation at the wholesale level, rose by a hefty 9.8 percent in July from a year ago.

That marked the biggest surge in annualised headline prices at the factory and farm gate since a 10.4 percent gain was recorded in June 1981.

The reading will likely not be welcomed by the Federal Reserve, which has been waging a campaign against inflationary pressures, but Fed policymakers expect inflationary pressures to ebb in coming months, especially as world oil prices have cooled markedly of late.

The core PPI rate, which strips out volatile energy and food costs, has increased by 3.5 percent over the past 12 months, marking the largest surge in the annualised core reading since May 1991.

On a monthly basis, overall prices rose by a more-than-expected 1.2 percent in July against market forecasts which had predicted a rise of 0.4 percent. The core rate rose by a more-than-anticipated 0.7 percent in July from June.

Economists said the surge in the core reading suggests producers may be trying to pass on increased costs through the price-chain as they vie to absorb rising commodity and material prices which have swept through the economy.

This could further stretch consumers' wallets which are already being stressed by a continuing credit crunch and a long-running housing market slump.

The markets got a fresh reminder of the ongoing woes afflicting the housing industry as a Commerce Department report showed that new home construction across the United States plunged 11 percent in July to the lowest level in 17 years.

After an unexpected rise in construction in June, home building fell to an annualised pace of 965,000 units, the report showed. That pace reflected the weakest pace of new construction since March 1991.

"New building codes enacted by New York City accounted for the big jump in permits and starts in June. July's 23.6 percent drop in multi-family starts and 32.4 percent drop in multi-family (building) permits is mostly payback for June's strong numbers," said Patrick Newport, an economist at Global Insight.

The central bank could in theory hike interest rates to cool inflationary pressures, but its hands have been tied by the simmering housing market slump.

The reports were issued as world oil prices tumbled further on Tuesday with prices in New York falling more than one dollar to around 111.80 dollars a barrel. Oil prices have dropped dramatically from record peaks over 147 dollars on July 11.

The Fed left its key interest rate anchored at 2.0 percent earlier this month, in part as it adopted a wait-and-see approach to inflation risks.

Wholesale food costs moderated in July from the prior month to show a gain of 0.3 percent and while energy prices also eased they remained relatively high, posting a gain of 3.1 percent in July, up from a 6.0 percent jump in June.

Prices of big-ticket durable goods rose 0.6 percent last month, showing an acceleration from a 0.3 percent reading in June.

Durable goods include autos and large household appliances such as refrigerators and washing machines. The rise in durable goods prices suggests producers may be struggling to endure rising material costs. - AFP/ms/de

 

 



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