Inflation, Housing Data Bolster Rate Hike Argument

Consumer Prices
Alan Diaz/AP
By Lucia Mutikani

WASHINGTON -- 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 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.

%VIRTUAL-pullquote-The barriers to a Fed hike are starting to crumble. The wait for the first rate hike may not be that much longer.%"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.

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 boosted technology shares.

Sentiment Slips

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 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.

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.

9 Numbers That'll Tell You How the Economy's Really Doing
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Inflation, Housing Data Bolster Rate Hike Argument
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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