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Consumer Prices in U.S. Increase by Most in More Than a Year

June 17 (Bloomberg) -- The cost of living in the U.S. rose more than forecast in May, reflecting broad-based gains that signal inflation will move closer to the Federal Reserve’s goal.

The consumer price index increased 0.4 percent, the biggest advance since February 2013, after climbing 0.3 percent the prior month, a Labor Department report showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.2 percent increase. Excluding volatile food and energy prices, the gain was the largest in almost three years.

A pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth, giving Fed officials reason to continue to scale back their unprecedented bond-buying program. Continued hiring and faster wage gains will be needed to boost demand and enable consumers to cope with higher prices.

“We’re seeing signs of pressure,” Samuel Coffin, an economist at UBS Securities LLC in New York, said before the report. “Improvement in the labor market and continued signs of price pressures that are a bit greater than we’ve been seeing, that will encourage a new set of thinking for the Fed.”

Last month’s increase in consumer prices exceeded all forecasts in the Bloomberg survey, which ranged from no change to a 0.3 percent advance.

Costs rose 2.1 percent over the past 12 months, the most since October 2012, after a 2 percent year-over-year gain in April.

Housing Starts

Another report today showed builders broke ground on 1 million homes in May, indicating the industry is picking up this quarter after a weather-induced slump to start the year.

The number of housing starts last month was in line with the median forecast of economists surveyed by Bloomberg and followed April’s 1.07 million annualized rate that was the most since November, according to figures from the Commerce Department. Permits, a proxy for future construction, decreased, reflecting a decline in the volatile multi family category.

The Labor Department’s inflation report showed that stripping out volatile food and fuel, the so-called core measure increased 0.3 percent, the most since August 2011, and following a 0.2 percent gain the prior month. Economists had forecast a 0.2 percent advance, according to the survey median.

The core index increased 2 percent from the same month in 2013 after a 1.8 percent gain in April.

The Fed’s 2 percent goal is based on the Commerce Department’s inflation gauge that is tied to consumer spending. That measure climbed 1.6 percent in the 12 months through April, and May data are scheduled for release June 26.

Energy, Food

Energy costs increased 0.9 percent from a month earlier, while food prices rose 0.5 percent, the most since August 2011.

Companies including natural and organic food producer Annie’s Inc. are taking steps to pass some of the expenses on to customers as input costs rise.

“We expect further upward price pressure in organic wheat, dairy and other commodities in fiscal 2015 and we plan to implement appropriate price increases,” John Foraker, the Berkeley, California-based company’s chief executive officer, said in a May 29 earnings call.

The May increase in prices meant that hourly earnings adjusted for inflation dropped 0.2 percent for a second month in May, according to another Labor Department report today. Over the past 12 months, real hourly pay declined 0.1 percent.

Fed officials led by Chair Janet Yellen reiterated at their April meeting that long-term inflation expectations remain stable. The Fed’s Open Market Committee is meeting today and tomorrow in Washington.

Monetary Policy

In April, the Fed pared its monthly asset-buying to $45 billion, its fourth straight $10 billion cut, and said further reductions in “measured steps” are likely.

The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

Wholesale prices decreased 0.2 percent in May, data showed last week. Import prices rose 0.1 percent last month following a 0.5 percent decline in April, according to a separate report released June 12.

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