Rising Inflation Underlines Challenge to Fed


The core level of inflation in the US reached its highest since mid-2006 last month, underlining the challenge facing the Federal Reserve as it seeks to steer the economy around a recession with a raft of interest rate cuts.

The core consumer price index, which excludes volatile energy and food prices, rose 0.3 per cent in January, after rising by 0.2 per cent in every month since March of last year, according to figures from the Labor Bureau. Economists had been expecting another reading of 0.2 per cent.

The rise in inflation was driven by higher prices on clothing, medical and education costs, and by a jump in hotel costs.

The US central bank slashed interest rates by 1.25 percentage points at the end of January, in the most abrupt easing by the Fed since the early 1980s.

Including energy and food costs, the CPI rose by 0.4 per cent for the second month in a row. Food costs were up by 0.7 per cent, the sharpest increase in a year.

The worrying inflation figures helped push US stocks into negative territory in early trading. Shortly after markets opened, the S&P500 index was down 0.7 per cent.

The inflation worries came as fresh data indicated that the downturn in housing shows little sign of abating. Although overall housing starts were up 0.8 per cent and largely in line with economists’ predictions, that followed a 15 per cent drop in December after builders broke ground on many fewer multi-family developments.

Multi-family starts, which can shift sharply from month to month, rose 25 per cent in January, coming back from the 39 per cent drop in December.

Housing starts of single-family homes fell to their lowest since January 1991 last month, according to the Census Bureau. Builders broke ground on new homes at an annual rate of 743,000, 5 per cent lower than in December. Single-family starts are now down 60 per cent from their peak at the beginning of 2006. Building permits, a measure of future activity, were also at their lowest in 17 years.

 


TradingEconomics.com, Financial Times
2/20/2008 9:50:10 AM