WRAPUP 1-U.S. inflation under wraps,housing strong in March

Forbes.com-Reuters, 04.16.03, 10:53 AM ETBy Tim Ahmann

WASHINGTON, April 16 (Reuters) - Inflation in the United States was dormant last month outside a jump in energy costs, while groundbreaking for new homes rebounded with surprising vigor after a big weather-related drop, the government said on Wednesday.

The Consumer Price Index, the most popular gauge of U.S. inflation, rose 0.3 percent last month, the Labor Department said. However, excluding volatile food and energy prices, the CPI was flat -- the tamest reading on so-called core inflation since it was last unchanged in February 1999.

"This is more good news on the inflation front. This is a very, very benign number. It's a sign of price stability," said Richard DeKaser, chief economist at National City Corp. in Cleveland. Economists had expected the CPI to rise 0.4 percent and the core index to edge up 0.2 percent.

A separate report showed housing starts leapt 8.3 percent last month -- the largest gain since September -- to a seasonally adjusted 1.780 million unit annual rate, well above the 1.694 million pace analysts had expected.

"Housing starts remain a bright spot in an economy that otherwise seems to be sputtering," said said Dana Johnson, the head of research at Banc One Capital Markets in Chicago.

Johnson and other analysts said the big jump marked an advance from a February level that had been temporarily depressed by unusually harsh winter weather.

Prices for U.S. Treasuries rose a shade and the dollar softened after the data. Stock prices rose at the opening bell, as investors focused on welcome earnings from high-tech bellwethers Intel Corp. (nasdaq: INTC - news - people) and Microsoft Corp. (nasdaq: INTC - news - people).

PRESSURE DROP

A 4.6 percent surge in energy costs accounted for more than 90 percent of the 0.3 percent rise in the overall CPI, Labor said.

Energy prices rose at an annual rate of nearly 77 percent over the last three months as oil prices spiked on a workers' strike in oil-rich Venezuela and worries over the potential for supply disruptions as the United States prepared for war against Iraq. However, oil prices began to drop sharply shortly before the war began.

While gasoline prices jumped 4.1 percent last month, an economist with Labor's Bureau of Labor Statistics said they were likely to be down about 8 percent in the CPI report for April due out next month, based on Energy Department data.

According to an Energy Department report released on Monday, prices at the pump have fallen 13.3 cents to an average $1.595 a gallon from the record high reached four weeks ago, just before the United States began bombing Baghdad.

BARELY BUDGED

With energy prices already receding, economists said the core inflation gauge, which has barely budged in recent months, marked a better measure of inflation trends.

Over the 12 months ended in March, core inflation has risen just 1.7 percent, matching February's climb as the smallest in 37 years. For the first quarter, the core CPI advanced at just a 0.8 percent annual rate, a sharp slowdown from last year's 1.9 percent increase.

"It's a good story, but not surprising given that there's lots of slack in demand for goods and services," Banc One's Johnson said. "With the economy continuing to struggle, core inflation should continue to drift lower over the next three to six months."

Economists said the subdued reading on core inflation offers scope for the Federal Reserve to lower interest rates further if needed to spur stronger growth.

Clothing prices extended a long slide, dropping 0.4 percent. Medical care costs, which had risen sharply last year, gained just 0.2 percent. Shelter costs held steady for a second straight month. Car prices rose just 0.2 percent last month, defying expectations among some economists for a larger gain.

"There certainly was some discounting here still going on," Labor's Patrick Jackman said.

While housing starts were up sharply last month, permits for future construction fell 7 percent last month, suggesting builders may anticipating a cooling market.

Housing activity has remained healthy despite a sluggish broader economy as mortgage interest rates have slid to lows not seen since the early 1960s.

However, some recent data have suggested the market may be cresting, although most economists and industry participants say they expect an orderly correction rather than a bust.

"Construction remains fundamentally sound," National City's DeKaser said. (Additional reporting by Mark Felsenthal)