ICS Magazine

US Economy Is Strong with Low Inflation

January 19, 2005
WASHINGTON (Reuters) - Falling energy costs pulled down U.S. consumer prices last month, but core inflation inched up and housing starts surged, according to data on Wednesday that bolstered expectations for a steady diet of interest-rate rises.

In addition, initial claims for jobless aid plummeted by 48,000 last week, the biggest drop in more than three years.

Analysts said the plunge in claims likely overstated the strength of the job market, but said the reports taken as a whole suggested the economy was on solid ground.

"The economy continues in a recovery mode ... with a restrained increase in prices," said Anthony Chan, senior economist at JP Morgan Fleming Asset Management.

The Consumer Price Index fell 0.1 percent in December, the first decline since July, the Labor Department (news - web sites) said. However, excluding food and energy, consumer prices moved up a moderate 0.2 percent for the third straight month.

"Overall, inflation remains tame and, in any event, (Federal Reserve Chairman) Alan Greenspan has it on a short leash," said Oscar Gonzalez, an economist at John Hancock Financial Services.

Prices for U.S. government bonds were little changed after the data, as traders bet the Fed would be successful in its efforts to contain inflation by gradually raising interest rates. Currency markets showed little reaction, while stock markets fell on corporate news.

For the year as a whole, consumer prices advanced 3.3 percent as energy costs surged 16.6 percent, their biggest rise since an oil-induced spike in 1990. Core prices, in contrast, advanced at a more-moderate 2.2 percent last year. Nevertheless, the core price gain was the biggest since 2001 and double its pace in 2003.

The Fed has raised overnight borrowing costs to 2.25 percent from a 1958 low of 1 percent in five small steps and analysts said officials would stay the course.

Separately, a Commerce Department report showed housing starts shot up 10.9 percent last month, the biggest jump in more than seven years. The rise took starts to an annual rate of 2.004 million units -- well above analysts' expectations.

Low mortgage lending rates, which averaged 5.8 percent in 2004 according to mortgage market giant Freddie Mac, have been supporting the housing sector despite short-term interest rate increases by the Fed.

However, some economists cautioned that the housing sector's hottest days may be over and noted that permits for future groundbreaking, an indicator of builder confidence, fell 0.3 percent in December to a 2.021 million unit pace.