Ascent of Price Index Eases in July

A government report Wednesday showing tamer consumer price increases suggested that inflation could be peaking as the economy and housing market slow.

For more evidence of that trend, look at lumber.

Home builders, contractors, remodelers and others who buy lumber should get some relief at the cash register soon -- if not already -- thanks in part to the slackening housing market.

“The prices aren’t going up,” said Asher Alfasi, a general contractor who runs Northridge-based B.A.R. Design & Construction and spends about $20,000 a month on lumber for the homes he builds and remodels. He said plywood prices are falling slightly.

Because lumber prices are so closely tied to the housing market and thus the overall economy, they could be as good an indicator as any of future inflation, said Gary Thayer, chief economist at brokerage A.G. Edwards & Sons.

Lumber prices began rising in 2003, preceding rises in other commodities, but futures prices recently dropped to their lowest level since early 2003, Thayer said in a note Wednesday.

The argument that inflation could be peaking -- and that the Federal Reserve was correct last week in pausing its program to hike interest rates -- was strengthened Wednesday when the Labor Department reported that core consumer prices moderated in July.

The core consumer price index, which excludes volatile energy and food prices, rose 0.2%, down from 0.3% in each of the four previous months. For the year ended in July, core prices were 2.7%, up from 2.6% in June.

Still, consumers felt the pinch of higher energy prices, which rose 2.9% in July. That helped push the overall consumer price index up 0.4% last month while real average weekly earnings fell 0.1% -- the second decline in three months. Consumer prices overall rose 4.1% from year-earlier levels, down from 4.3% in June.

Some economists said the latest data were inconclusive and inflation could still go higher. The Fed, they said, should raise rates further to stem the inflation threat.

But investors bid stock prices higher and bond yields lower, reasoning that inflation could be ebbing, providing justification for the Fed to refrain from another rate hike at its next meeting in September.

The yield on the 10-year Treasury note slid Wednesday to 4.86%, its lowest level since early April, suggesting the bond market believes inflation is not a concern -- for now.

In another sign of potential inflation relief, the price of a barrel of oil dropped Wednesday in New York to $71.89, its lowest level since late June.

Consumers appeared to be pulling in their horns where they could in July. A sharp 1.2% drop in apparel prices was largely responsible for keeping the core inflation rate increase so low.

Merrill Lynch economist David A. Rosenberg said the moderation in inflation was all the more remarkable because it followed “the most powerful bull market in commodities in at least three decades.”

That, he said, “tells you a thing or two about pricing power, or lack thereof, as you get closer and closer to the tapped-out, savings-stretched, income-challenged, ever-price-conscious consumer sector.”

Economists said back-to-school sales could suffer if consumers tighten their belts too much. But that would put more downward pressure on prices.

If inflation is peaking and the economy doesn’t tumble into recession, investors will get the “soft landing” -- sustainable growth with moderate inflation -- they’ve been hoping for. In 1995, a soft landing after a series of Fed rate hikes ushered in one of the biggest stock market rallies ever.

But because inflation is a lagging indicator, the Fed usually overshoots and raises rates too high, sending the economy into recession -- as was the case in 1990-1991 and 2001.

More signs of a slowing economy came Wednesday when the Federal Reserve reported that industrial production rose by 0.4% in July, half the gain in June.

The Commerce Department, meanwhile, said new home construction dropped 2.5% in July, the fifth decline in six months. That dropped construction to a seasonally adjusted annual rate of 1.795 million units, the slowest pace since November 2004. Building permits, considered a good barometer of future activity, dropped 6.5%.

The deteriorating housing market may be a bigger concern for the Fed than inflation and may prompt the central bank to consider cutting its benchmark interest rate to 5%, some analysts said.

“Fed policymakers might soon begin to fret more over the possibility of home price deflation than faster core price inflation,” said John Lonski, an economist with Moody’s Investors Service. “Housing’s contraction should help slow domestic expenditures by enough to sufficiently diminish inflation risks.”

For home builders experiencing a drop in business -- or bracing for one -- the prices they pay for materials can’t come down fast enough. Everything such as cement and plywood went through the roof during the boom.

Chris Behr, a home builder and remodeler based in La Canada Flintridge, said he had not seen prices come down yet but believed it was only a matter of time before they do.

“Lumber has got to drop,” he said. “Demand drops first, and then the lumber yards get more realistic.”