Tuesday, May 15, 2007

U.S. Economy: Consumer Prices Rose Less Than Forecast (Bloomberg)

By Joe Richter

May 15 (Bloomberg) -- Prices paid by U.S. consumers rose less than forecast in April, a sign that inflation is abating as the economy cools.

The consumer price index increased 0.4 percent after climbing 0.6 percent in March, the Labor Department said today in Washington. Economists surveyed by Bloomberg News projected a 0.5 percent gain. Core prices, which exclude food and energy, rose 0.2 percent.

The 2.3 percent annual increase in core prices, also less than forecast, suggests that surging fuel costs aren't triggering a broader jump in the cost of living. The report may reassure Federal Reserve officials, who are counting on slower growth to ease inflation.

``It's consistent with a gradual unwinding of inflation pressures,'' said Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts. ``There's nothing in here to push the Fed one way or the other.'' Policy makers have kept their benchmark rate unchanged at 5.25 percent since August.

Other reports today showed manufacturing was improving and home builders were more pessimistic. The New York Fed said manufacturing in the state expanded at a faster pace for the second straight month in May. The main index in the Empire State Manufacturing Survey rose to 8.0 from 3.8 in April. Readings greater than zero signal expansion.

Builder Index

The National Association of Home Builders/Wells Fargo sentiment index fell to 30 from 33 in April. The reading matched September's figure as the lowest since 1991. Readings below 50 mean most respondents view conditions as poor.

Treasury notes rose after the inflation figures were released before giving up gains later in the day. Stocks rallied. The Dow Jones Industrial Average was up 37 points at 4:15 p.m. in New York.

Core prices were projected to rise 0.2 percent, according to the survey median. The increase in the 12 months ended in April, the smallest in a year, was forecast at 2.4 percent.

``Things are moving gradually toward lower inflation, which is what the Fed expects,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``It leaves them on hold for the time being.''

Overall prices were up 2.6 percent from the same time last year, compared with a 2.8 percent gain in March.

The CPI is the government's broadest gauge of costs because it includes goods and services. Other inflation reports last week showed core wholesale prices were unchanged in April, while prices of U.S. imports rose for a third month.

Fuel Prices

Today's report showed energy prices rose 2.4 percent after jumping 5.9 percent in March. Fuel oil costs rose 2.1 percent and natural gas prices fell 1 percent. Gasoline prices jumped 4.7 percent.

Prices at the pump for regular gasoline averaged $2.83 a gallon in April, up from $2.56 in March, according to the American Automobile Association. The price rose throughout the month, ending at $2.97 on April 30, just shy of the record $3.06 reached in Sept. 5, 2005, in the aftermath of Hurricane Katrina. The record was eclipsed this month as the price reached $3.09 a gallon yesterday.

Food prices, which account for about a fifth of the CPI, rose 0.4 percent after a 0.3 percent increase in March.

Procter & Gamble Co., the largest U.S. consumer-goods maker, raised prices last quarter as raw-material costs increased, Chief Financial Officer Clayton Daley said May 1. Green coffee, pulp used in paper products and zinc for batteries were all more expensive, he said.

Housing, Rent

Housing costs, which include some energy costs and account for one-third of the total consumer price index, rose 0.2 percent for a second month. Owner's equivalent rent, which makes up 30 percent of the core CPI, increased 0.2 percent after rising 0.3 percent. The cost of hotel stays jumped 1.9 percent.

Higher medical care costs and hotel rates were offset by lower prices for clothing and cheaper airline fares, the report also showed. Auto prices were unchanged.

The Fed's preferred measure, the Commerce Department's price figures tied to consumer spending patterns, was up 2.1 percent in March from a year earlier. Some Fed policy makers have said they want to see the measure within a 1 percent to 2 percent range.

`Somewhat Elevated'

Central bankers last week left their interest-rate target unchanged and said core inflation remains ``somewhat elevated.'' The risk that inflation won't moderate as expected is the central bank's ``predominant concern,'' they also said.

The economy grew 2.1 percent in the 12 months ended March, the smallest year-over-year gain since June 2003, a government report last month showed. Economists forecast growth of 2.1 percent for all of 2007, the least in five years, based on the median estimate in a Bloomberg survey April 30 to May 8.

Reports last week raised hopes that price pressures won't increase much more. While higher costs for food and fuel pushed wholesale prices up last month, core prices were unchanged for a second month. The last time core costs went two months without an increase was the end of 2005.

A separate report showed prices for imported capital goods fell and those for foreign-made consumer products rose just 0.1 percent.

In addition, wage growth slowed last month and the unemployment rate rose, providing some relief to central bankers who have voiced concern that a tight labor market would stoke inflation.

Costs ``are beginning to plateau,'' P&G's Daley said in an interview. ``We are hoping we don't have to raise prices anymore.''

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