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US home building prices hits 17-year low

4 min

Two economic reports from the US Labor and Commerce departments showed a rise in wholesale prices, coupled with a slump in new home construction, are continuing to plague the American economy.

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A pair of troubling US economic reports released Tuesday showed a sharp uptick in wholesale prices and a heavy slump in new home construction are continuing to plague the world's largest economy.

The Labor Department said wholesale prices had spiked by their largest margin in 27 years in the year to July, rising an annualized 9.8 percent. The report, which set off inflationary alarms on Wall Street, sent US financial markets into a nosedive.

The markets also got a fresh reminder that the ailing housing industry remains stuck in a rut as a Commerce Department report showed new US home construction plunged 11 percent in July to its lowest level in 17 years.

"Inflation is way too hot and with housing way too cold, we have the opposite of a Goldilocks economy," said Joel Naroff, president of Naroff Economic Advisors.

A "Goldilocks economy" refers to economic conditions that are not too hot or too cold.

Inflation angst rose as the producer price index (PPI), a key gauge of inflation at the wholesale level, rose by its largest annualized rate since a 10.4 percent gain was recorded in June 1981.

Economists said the report makes clear that costs at the factory and farm gate have surged.

The latest inflation news will likely not be welcomed by the Federal Reserve, which has been waging a campaign against bubbling price pressures.

Fed policymakers, however, expect inflationary pressures to ebb in coming months, especially as world oil prices have cooled dramatically of late.

The core PPI rate, which strips out volatile energy and food costs, has increased by 3.5 percent over the past 12 months, marking the largest surge in the annualized core reading since May 1991.

On a monthly basis, overall prices rose by a more-than-expected 1.2 percent in July against market forecasts which had predicted a much more moderate rise of 0.4 percent. The core rate rose by a more-than-anticipated 0.7 percent in July from June.

The surge in the core reading suggests producers may be trying to pass on increased costs through the price-chain as they struggle to absorb rising global commodity and material prices which have swept the US economy.

This could further stretch consumers' wallets which are already being stressed by a continuing credit crunch and the long-running housing slump.

After an unexpected rise in construction in June, home building activity meanwhile fell to an annualized pace of 965,000 units, the Commerce Department report showed. That reflects the weakest pace of new property construction since March 1991.

"New building codes enacted by New York City accounted for the big jump in permits and starts in June. July's 23.6 percent drop in multi-family starts and 32.4 percent drop in multi-family (building) permits is mostly payback for June's strong numbers," said Patrick Newport, an economist at Global Insight.

The central bank could in theory hike interest rates to cool inflationary pressures like it did in 1981, but its hands have been tied by the simmering housing downturn.

The Fed left its key interest rate anchored at 2.0 percent earlier this month, in part as it adopted a wait-and-see approach to inflation risks.

The reports were issued as world oil prices remained under pressure. A key New York oil futures contract gained over one dollar to close at 114.53 dollars a barrel, but prices have fallen heavily from record peaks over 147 dollars on July 11.

Wholesale food costs moderated in July from the prior month to show a gain of 0.3 percent and while energy prices also eased they remained relatively high, posting a gain of 3.1 percent in July, up from a 6.0 percent jump in June.

Prices of big-ticket durable goods rose 0.6 percent last month, showing an acceleration from a 0.3 percent reading in June.

Durable goods include autos and large household appliances such as refrigerators and washing machines.

The Dow Jones Industrial Average closed down 1.14 percent at 11,348.55 in the wake of the reports.
 

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