Reports Alleviate Inflation Fears on Wall Street
Two reports released today indicate that wholesale prices remain tame and the housing market continues to cool, alleviating inflation worries that had rattled Wall Street late last week.
The Labor Department said the producer price index rose 0.9 percent in April, but excluding food and energy prices edged up just 0.1 percent, less than the 0.2 percent expected by economists.
Also today, the Commerce Department said the number of new homes on which construction was started fell by 7.4 percent, to an annual pace of 1.85 million, last month. It was the third straight monthly drop in housing starts. The number of permits issued for new homes, an indication of future construction activity, fell 5.4 percent, to an annual pace of 1.98 million.
Stocks and bonds were up slightly after the reports were released. Markets posted two straight days of declines at the end of last week as investors worried that higher inflation would prompt the Federal Reserve to raise short-term interest rates again.
The figures released today could help sway the Fed, which has left its options open, to leave rates, currently at 5 percent, unchanged at its meeting on June 28-29. Investors and policy makers will also be watching a key consumer prices report that is due out on Wednesday.
"Similar good news in tomorrow's report on consumer prices will heighten speculation that the Fed's long tightening campaign is near an end," Kenneth Beauchemin, an economist at Global Insight, a research firm, wrote in a note to clients.
Unlike consumer prices, which are paid by end-users, wholesale prices do not include taxes and distribution costs. Energy prices jumped a sharp 4 percent in April as gasoline prices reached $3 a gallon in many parts of the country. Food prices were up 0.1 percent. Compared to a year ago, wholesale prices were up 4 percent, and, excluding food and energy, they were up 1.5 percent.
The housing report, meanwhile, showed that a steep 13.1 percent jump in home construction activity in January may indeed have been a temporary blip caused by the unseasonably warm weather early this year, as many analysts had suspected it was.
Separately, the Federal Reserve said today that industrial production increased by 0.8 percent in April as mines, factories and power plants increased their output. Capacity utilization, a measure of how fully factories are running, climbed to 81.9 percent from 81.4 percent. Production has increased for three months in a row and is up 4.7 percent from April 2005.