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Economic Watch: Core Consumer Prices Up, Homebuilding Brisk

January 20, 2016

By Evan Lockridge

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Inflation at the retail level is anything but a threat to the health of the U.S. economy. Newly released figures show a drop in the final month of 2015 while the housing market is expected to continue improving.

According to the U.S. Commerce Department, the Consumer Price Index (CPI), which measures everything people pay for from apples to autos, fell 0.1% in December from the month before. The decrease was driven by declines in food and energy prices, following no change in November.

When both of these volatile sectors are removed, the so-called core CPI posted a 0.1% gain for December, its smallest increase since August following increases of 0.2% the past three consecutive months.

The CPI increased 0.7% for the 12-month period through December. Tha was its biggest gain in a yea,r following a year-over-year increase of 0.5% in November. But it was smaller than the 2014 gain of 0.8% and the second smallest December-to-December increase in the last 50 years, according to the department.

The core CPI rose 2.1% for 2015, the largest increase since June 2012 due to price hikes for shelter and medical care.

Headline CPI is forecasted to pick up further in the near term due to base effects from earlier declines in gasoline prices, said RBC Economics. However, renewed weakness in energy prices will provide some offset to keep the annual reading below 2% for much of 2016.

The report follows one from last week showing prices at the wholesale level fell 0.2% in December from the month before. The Producer Price Index (PPI) also posted a 1% drop for all of 2015, the biggest decline in five years.

The reports also comes as the U.S. Federal Reserve raised interest rates late last year, despite the nation’s overall inflation rate being below its annual target of 2%. With policymakers set to meet late this month, there is increased speculation they will hold off on another interest rate hike until later this year.

“Our forecast assumes core inflation will remain at or above 2% throughout 2016 which should improve the Fed’s confidence that it can achieve its 2% inflation objective over the medium term even with a gradual withdrawal of monetary policy stimulus,” said Josh Nye, economist at RBC Economics. “While we expect the fed funds rate will be held steady in January, we continue to look for 100 basis points (1%) of rate hikes this year.”

Homebuilding Improves from Year Before

Meantime, two separate reports show one sector of the economy remains relatively strong, but just not quite as strong as it was the month before. Yet the outlook is still bright.

Housing starts fell 2.5% in December from the month before to an adjusted annual rate of 1.149 million, according to the Commerce Department, following a 10.1% advance in November.

Despite the month-over-month drop, the level is 6.4% higher than a year earlier.

For all of 2015, there were more than 1.11-million home starts in the country, 10.8% higher than 2014 level.

The pullback in new home construction in December was broad-based with both multiples and single-unit starts falling after recording robust gains in the previous month, according to RBC Economics.

The numbers for the new building permits issued, an indicator of future activity, followed similar trends. They fell 3.9% from November, but came in 14.4% higher than in December 2014.

There were nearly an estimated 1.18-million new building permits issued in 2015, a 12% improvement from 2014.

“Despite growing evidence of a slowing in final domestic demand in the fourth quarter of 2015, we remain of the view that the domestic drivers of growth will bounce back to around a 3% annualized pace through 2016 with pent-up housing demand contributing to homebuilders ramping up housing starts through the forecast horizon,” said RBC Economist Laura Cooper.

Such feelings are reflected in a survey of the nation’s homebuilders, with their confidence in the market for newly built single-family homes holding steady this month.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) turned in a reading of 60 following a downwardly revised December reading that was the same.

“January’s HMI reading is right in line with our forecast of modest growth for housing,” said NAHB Chief Economist David Crowe. “The economic outlook remains promising, as consumers regain confidence and home values increase, which will help the housing market move forward.”

The index gauges builder perceptions of current single-family home sales and sales expectations for the next six months and also asks builders to rate traffic of prospective buyers. Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI component gauging current sales condition rose two points to 67 in January. The index measuring sales expectations in the next six months fell three points to 63, and the component charting buyer traffic dropped two points to 44.

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