Data suggest inflation is tame amid economic rally

A series of reports Thursday implied the U.S. economy was regaining its vigor at the end of 2006 and the start of 2007 without creating an inflation surge.

Not only was there an unexpected pickup in new-home building in December but also the pace of January business activity in the Philadelphia area picked up and new claims for unemployment benefits fell to an 11-month low last week.

Nonetheless, the Labor Department said core consumer prices, which exclude food and energy costs, rose by a relatively tame 0.2% last month after being flat in November. The overall consumer price index was up 0.5% in December after being unchanged in the previous month.

An index prepared by the Philadelphia regional Federal Reserve bank showed business activity this month at its highest level since August, when concern about a slowdown was growing.

The index, which is taken as an early indicator of the health of the U.S. manufacturing sector, hit 8.3 in January, compared with a revised minus 2.3 in December.

Lynn Reaser, chief economist for Banc of America Capital Management in Boston, said the Philadelphia Fed report confirmed that the economy was on such solid ground that there were unlikely to be any interest-rate cuts soon.

The data “will continue to dim the prospects of an easing by the Fed, at least in the near term,” Reaser said.

Energy was the main reason that consumer prices climbed in December. Energy prices rose 4.6% after a 0.2% fall in November and bigger drops in September and October, but that should abate as world oil prices ease.

“The latest consumer inflation report indicated that core consumer inflation is gradually dissipating following its early-year bulge,” said Peter Kretzmer, senior economist for Bank of America in New York.

A Commerce Department report said housing starts unexpectedly climbed 4.5% in December to a seasonally adjusted annual rate of 1.642 million units from November’s 1.572 million.