Data points to firming US economy, inflation

Underlying US inflation increased more than expected in February as rents and medical costs maintained their upward trend, which could keep the Federal Reserve on course to gradually raise interest rates this year. Other data yesterday showed the housing market continuing to strengthen last month and manufacturing stabilising. While the Fed is expected to stand pat at its policy meeting later yesterday, stirring inflation, a steady housing sector and tightening labour market conditions have raised the probability of a rate hike in June. “The Fed could easily signal that rate hikes are coming, possibly sooner than most think. Today’s numbers, especially the inflation report, is a warning that the days of no price pressures are behind us,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3% last month after a similar gain in January. That lifted the so-called core CPI 2.3% in the 12 months through February, the largest increase since May 2012, after it advanced 2.2% in January. Economists polled by Reuters had forecast the core CPI rising 0.2% last month and increasing 2.2% from a year ago. The Fed has a 2% inflation target and monitors a price measure that has also pushed higher in recent months. The US central bank raised its benchmark overnight interest rate in December for the first time in nearly a decade. The dollar rose against a basket of currencies, while prices for US Treasury debt fell. US stocks were little changed, though the S&P homebuilding index rose 0.34% as D R Horton and Lennar Corp shares gained. In a separate report, the Commerce Department said housing starts increased 5.2% to a seasonally adjusted annual pace of 1.18mn units last month, the highest level in five months. Groundbreaking activity had been held back by adverse weather. While the rebound in housing starts offered a lift to first-quarter gross domestic product growth estimates, that was offset by a drop in utilities output as temperatures warmed up in February. First-quarter growth is forecast around a 2% annual rate, an acceleration from the 1.0% rate logged in the final three months of the year. In a third report, the Fed said industrial production declined 0.5% as mining and utilities tumbled. Industrial production rose 0.8% in January. But manufacturing output increased 0.2% last month after spiking 0.5% in January. The rise in factory output added to manufacturing surveys in suggesting that the downturn in the sector, which accounts for 12% of the US economy, had probably run its course. Factories have been hit by dollar strength and lower oil prices. “The overall outlook for the US industrial sector is beginning to look a little better,” said Millan Mulraine, deputy chief US economist at TD Securities in New York. The housing sector is being supported by a firming labor market, which is encouraging young adults to leave their parents’ homes. But builders cannot keep up with the demand for housing because of a shortage of lots and skilled labour, which is driving rents higher in major metropolitan areas. The second month of broad increases in the core CPI was driven by a 0.3% increase in rents, which followed a similar gain in January. Medical care costs rose 0.5% after advancing by the same margin in January. Prescription drug prices rose 0.9%, while the cost of hospital services increased 0.5%. Apparel prices rose by the most in seven years. The second straight month of increase in apparel prices is rather surprising given that retailers have been giving big discounts to clear unwanted merchandise from their warehouses. Consumers also paid more for new motor vehicles and used cars and trucks. But a 13% drop in gasoline prices, which offset both the increase in core CPI and a 0.2% gain in food prices, lead to the overall CPI falling 0.2% in February. The CPI was unchanged in January. Last month’s drop resulted in the CPI increasing 1.0% in the 12 months through February, slowing after a 1.4% rise in January.Contractors install a window on a home under construction at Gale Ranch development in San Ramon, California. The Commerce Department said housing starts increased 5.2% to a seasonally adjusted annual pace of 1.18mn units last month, the highest level in five months.