Before everyone gets up on their seats and starts cheering, it would be well to bear in mind that in the same way that one swallow doesn't make a summer, one months good news on the US deflation front doesn-t mean the alert's over. Certainly looking at the US stock market this week you would think the recovery was, by now, a foregone conclusion. The reality is it isn't, by a long way. The markets are reaching the upbeat conclusion because it has to happen sometime, doesn't it. And with bags of stimulus, and historically super-low interest rates, that sometime should be now. But what if things are a bit different this time round. What if in a world where the number two and number three economies are mired in enduring low\negative growth problems and many other economies look extremely lacklustre, what if in this world things proved to be a bit out of the ordinary for the US too. Time, as they say, will tell.
A rise in lodging and housing costs pushed underlying U.S. inflation up in May at the fastest rate in nine months, the government said on Tuesday in a report that soothed deflation fears. At the same time, falling energy costs kept overall consumer prices steady. Separate reports showed heavy industry struggling last month, but the housing sector buoyant. The Consumer Price Index, the most widely used gauge of U.S. inflation, was unchanged last month, the Labor Department said. But the so-called core CPI, which strips out volatile food and energy prices, advanced 0.3 percent. It was the biggest rise in the core index since a matching gain in August last year.
The report showed prices a bit firmer than Wall Street had expected. Economists had looked for the overall CPI to drop 0.1 percent and the core rate to gain 0.1 percent. "The concerns about deflation will be softened after this number," said Rick Egelton, deputy chief economist at BMO Financial Group in Toronto. Stock prices initially rose as deflation fears eased, while Treasury prices fell as investors scaled back bets the Federal Reserve would act boldly to head off the threat of falling prices. The White House weighed in, saying deflation -- a decline in the overall level of consumer prices that can hobble an economy -- was not a serious worry at this time. In a separate report, the Fed said output at factories, mines and utilities edged up 0.1 percent last month after a 0.6 percent plunge in April. But industry continued to be burdened by idle capacity. The so-called capacity use rate held steady at 74.3 percent for a second straight month -- the lowest figure since June 1983. While the U.S. industrial sector struggled, a third report showed housing remained an economic bright spot. The Commerce Department (news - web sites) said housing starts rose 6.1 percent to a seasonally adjusted annual rate of 1.732 million units, slightly above analysts' expectations.
Core inflation had slowed sharply this year, fueling worry the economy could tip into deflation. But May's gain helped pull the 12-month change in the underlying inflation rate up to 1.6 percent, a tick above the 37-year low reached in April. The department pinned most of May's rise in the core index to a 0.6 percent climb in shelter costs, which include lodging away from home and the cost of housing for homeowners. It was the biggest gain in shelter costs in more than 12 years. Lodging costs rose a steep 4.1 percent, the largest gain on records beginning in December 1997. Lodging costs had fallen sharply earlier this year, a drop many economists attributed to a falloff in tourism ahead of the war in Iraq . Homeowners' housing costs, which account for more than one-fifth of the overall CPI, rose 0.2 percent after a flat April reading. Energy costs fell 3.1 percent, the second straight monthly drop, as prices boosted by war worries continued to ease. The cost of gasoline plummeted 6.8 percent and fuel oil prices slid 6.3 percent. Natural gas costs fell 1.6 percent.
Source Yahoo News