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Economic Watch: Consumer Prices Jump, May Push Interest Rates Higher

While the strength of nation’s homebuilding market has eased just a bit, it remains robust. Meanwhile, a measure of consumer prices show it’s approaching a level the Federal Reserve has said it needs to hit in order to raise interest rates.

Evan Lockridge
Evan LockridgeFormer Business Contributing Editor
October 19, 2016
Economic Watch: Consumer Prices Jump, May Push Interest Rates Higher

 

5 min to read


While the strength of nation’s homebuilding market has eased just a bit, it remains robust. Meanwhile, a measure of consumer prices show it’s approaching a level the Federal Reserve has said it needs to hit in order to raise interest rates.

The Commerce Department reported on Wednesday total housing starts in the U.S. fell 9% in September from the month before, the second straight monthly drop and short of many analysts’ expectations. However, new construction of single family homes, the biggest share of the market, increased 8.1% to its highest level since February. In contrast, new construction on multifamily units dropped a sharp 38%, the largest decline since 2009.

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An indicator of future building activity, the number of new home building permits issued, rose 6.3% in September from August, hitting a year-to-date high level. It also improved 8.5% above the level from September 2015, indicating the underlying strength of the new home market.

“The overall unexpected decline leaves housing starts down an annualized 7% in third quarter, although the gross domestic product (GDP) implications are not as negative as the headline suggests, with the decline concentrated in multi-unit starts, while single unit starts, which have a greater impact on GDP growth, posted a modest increase,” said Josh Nye, economist at Royal Bank of Canada Economic Research.

His group is expecting a a slightly greater moderation in homebuilding activity in the current quarter on top of recent weakness in existing home sales, down an annualized 9% in July and August relative to the second quarter.

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“Overall, we forecast a 0.3 of a percentage point drag on GDP growth from the residential sector, although strength in consumer spending and improving business and inventory investment are expected to provide more than enough offset,” Nye said. “We are now monitoring GDP growth to pick up to 2.6% in the third quarter from a disappointing average of 1.1% in the first half of the year.”

Home Builder Confidence Remains High

This follows a report from Tuesday showing builder confidence in the market for newly constructed single-family homes remains on firm ground this month, despite falling two points to a level of 63, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index.

“Even with this month’s drop, builder confidence stands at its second-highest level in 2016, a sign that the housing recovery continues to make solid progress,” said NAHB Chairman Ed Brady. “However, builders in many markets continue to express concerns about shortages of lots and labor.”

Two of the three HMI components posted losses in October. The one gauging current sales conditions dropped two points to 69 and the index charting buyer traffic fell one point to 46. Meanwhile, the index measuring sales expectations in the next six months rose one point to 72.

“The October reading represents a mild pullback from a jump in September, and indicates that the housing market continues to make slow and steady gains,” said NAHB Chief Economist Robert Dietz. “Moreover, mortgage rates remain low and the HMI index measuring future sales expectations has been over 70 for the past two months. These factors will sustain continued growth in the single-family market in the months ahead.”

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Consumer Prices Rise At Fastest Pace In Five Months

Meantime, a separate report released Tuesday by the Commerce Department shows retail prices in the U.S. rose at their fastest rate in five months during September.

The 0.3% increase in the Consumer Price Index (CPI) from the month before came in at the same level as a consensus estimate by analysts and follows a 0.2% gain in August.

Increases in shelter and gasoline cost were the main causes of the overall rise as gasoline rose 5.8% in September from the month before and accounted for more than half of the all items increase, according to the department. The cost of shelter increased 0.4%, its largest jump since May.

Year-over-year the CPI is up 1.5%, the highest since October 2014. However, so called “core prices” where volatile food and energy prices are excluded, the increase was 2.2% over the past year, down from a rate of 2.3% a month earlier.

“There is little to suggest a meaningful pickup in underlying price pressure, but inflation is moving toward the Fed’s objective, and should continue to do so, as the drag from energy prices, and to a lesser extent import prices, eases,” said RBC’s Josh Nye.

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He said the report, at least on its own, is unlikely to tip the Fed’s consensus in favor of an interest rate hike, after what was apparently a “close call” at the committee meeting in September. However, he pointed out if labor market data also maintain an improving trend toward the end of the year, “markets will continue to price in decent odds of a December rate hike.”

Lindsey Piegza, chief economist at Stifel Fixed Income, said the report on the CPI could be viewed as a sign that inflation is getting closer to the Federal Reserve’s long-run objective of 2%. However, she said, most on the Federal Reserve’s Open Market Committee would prefer a clear indication of widespread price gains, as opposed to isolated increases in one or two particular categories.

“Most policy makers continue to expect inflation to run below the committee's 2% target for the next several years, creating no sense of immediacy to adjust policy, at least not yet,” she said. “Nevertheless, those members who have been anxious to raise rates but hesitant to do so with still-minimal support from the data, may view even a subtle rise in inflation as justification to increase rates for the second time by the end of the year."

Piegza noted sharp contrast in recent comments from Fed committee members. Federal Reserve Governor Stanley Fischer on Monday suggested the Fed is “close” to its inflation target, saying there are limits to how far the Fed's "accommodative policy can be pursued without the risk of falling behind the curve." But Federal Reserve Chair Janet Yellen said on Oct. 14 that there are  “plausible ways” that maintaining extremely low rates can help foster further improvement in the labor market and continue to amend the damage caused by the Great Recession.

According to Piegza, “the gap between Fischer and Yellen’s comments simply highlights the ongoing divergence in opinion among committee members, suggesting the upcoming policy debate in November, and more importantly at the December meeting, will be fruitful to say the least.”

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