May CPI Rises 0.3%, Highest Since 1996
Consumer prices in May rose at the fastest pace in nearly a year and a half and factory output rose, the government said Tuesday, as sturdy domestic demand kept the economy growing despite weakness in Asia.
Analysts said the reports pointed to a slight pickup in inflation but predicted the Federal Reserve Board will hold interest rates steady because higher rates would attract even more capital from overseas, aggravating Asia’s economic woes.
The Labor Department said the consumer price index, the government’s main inflation gauge, rose 0.3% in May after a 0.2% rise in April. It was the biggest increase since a matching 0.3% rise in December 1996.
The so-called core CPI, which excludes volatile food and energy prices, rose 0.2% after a 0.3% April increase.
Separately, the Commerce Department said housing starts fell for the third consecutive month in May, declining 0.7% from April to a seasonally adjusted annual rate of 1.53 million units, a still-healthy pace that was up 9% from a year earlier.
Housing industry analysts said mild weather at the start of the year encouraged a burst in building that had leveled off, but they insisted that housing markets remained healthy.
“It’s still a solid level of activity,” said analyst Paul Taylor at America’s Community Bankers. Applications for building permits rose 1.8% in May, highlighting builders’ optimism about future activity.
In another report, the Fed said industrial output rose 0.5% last month after a 0.3% April increase.
Manufacturers of autos, computers and other goods boosted output 0.2% after a 0.5% gain in April, the Fed said.
The reports underlined the contrast between the nation’s strong economy and withering conditions in Japan and elsewhere in Asia that have sent financial markets reeling.
“We’ve now got a sharp discontinuity between a strong domestic economy and weak overseas conditions,” said economist David Kelly of Primark Decision Economics Inc.
“Financial markets think East Asia is the most important thing in the world, and the U.S. consumer clearly couldn’t care less,” he added.
Financial markets showed little reaction to the data.
The rise in consumer prices was fueled by a 0.3% rise in energy costs, which had fallen for five months in a row, and higher prices for fresh fruit, tobacco and clothing.
“It’s not a dramatic shift, but there is a mild upward drift in the underlying inflation rate,” said economist Michael Moran of Daiwa Securities America Inc.
The bump up in energy prices was the first increase since September. But since May, the price of crude oil has fallen to almost a 12-year low.
Food prices rose 0.6%--the most since October 1996. Lettuce costs soared 26.4%, the result of El Nino’s rains washing out California vegetable fields. Vegetable prices overall shot up 11.9%, the biggest increase in three years.
Cigarette prices jumped 2.6%. Prescription drug prices rose 1%, the most since August 1991.
Asia’s impact was evident in a 4.5% drop in personal computer prices and a 0.3% decline in new cars last month, as well as decreases for sporting goods, home furnishings and video and audio equipment.
“In spite of well-publicized, perhaps overemphasized problems in other parts of the world, the U.S. economy continues to display healthy and well-balanced growth,” said economist Ken Mayland of KeyCorp in Cleveland.
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Consumer Price Index
Monthly percentage change, seasonally adjusted:
May: +0.3%
Source: Bureau of Labor Statistics
Housing Starts
Seasonally adjusted annual rate, millions of units:
May: 1.53 million
Source: Commerce Department
