Consumer prices up 0.3% in March; housing starts plunge

WASHINGTON (Reuters) — Consumer prices rose a less-than-expected 0.3% in March, leaving the Federal Reserve some room to lower interest rates to ward off a housing-led slowdown, and the construction of new homes plunged in March to the lowest level in 17 years, according to reports Wednesday.
While the slide in the housing sector continued, industrial production unexpectedly rebounded as utilities raised output due to colder weather, according to the Fed, making up for weak manufacturing growth.

And a fourth report showed that higher prices and rising unemployment resulted in falling wages in March. After adjusting for inflation, average weekly earnings for non-supervisory employees dropped 1% last month, compared to the same period a year ago. It was the sixth month that inflation-adjusted wages were down.

The rise in March's consumer price index was less than the 0.4% gain that economists had forecast. Prices were flat in February. So-called core consumer prices, which exclude food and energy, were up 0.2% — in line with expectations — after also being unchanged in February, the Labor Department said.

Energy prices gained 1.9% in March after declining 0.5% in February. Costlier energy has been a major factor in rising concern about potential inflation, but it did not show through strongly in the March data.

Over the past 12 months, inflation is up 4%, reflecting relentless gains in energy costs, which are up 17% over that period, and food prices, which are up 4.4%.

For individual food items, the gains are even more stark, with the price of bread up 14.7% over the past year and milk prices up 13.3% over the same period.

While financial markets initially greeted the consumer price data as providing greater scope for the Fed to lower interest rates, not everyone agreed.

"In spite of a benign core reading, the overall increase will persuade the Fed to be less aggressive in easing rates," said Richard DeKaser, chief economist at National City in Cleveland.

The department said that in the first quarter this year, overall consumer prices rose at a seasonally adjusted annual rate of 3.1%, down from the 4.1% rise posted for all of 2007. Core prices in the first quarter gained at a 2% rate, under the 2.4% rise for all of 2007.

Prices for apparel dropped for a second month, down 1.3% after falling 0.3% in February. The department said the March decline was the largest since September 1998, possibly a sign that retailers are being forced to cut prices to lure hard-pressed consumers into stores.

Car prices slipped 0.1%.

But a range of other costs moved higher. The Labor Department's housing-cost gauge moved up 0.4%, reflecting a sharp gain in utility costs. A measure of owner-occupied housing costs not affected by energy rose 0.2%.

Housing starts set an annual pace of 947,000 units in March, lower than the 1.02 million expected by economists. The February starts figure was revised upward to 1.075 million from the 1.065 million originally reported.

"These housing starts suggest that the pace of decline is intensifying, which is the last thing the U.S. economy needs right now," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.

Building permits fell 5.8% to an annual rate of 927,000, the slowest pace since a 916,000 rate set in April 1991. Economists polled by Reuters had forecast March permits at 970,000 after the 984,000 rate of February.

Industrial production increased 0.3% last month following a sharp 0.7% decline in February, the Fed said. That was better than the small decline of 0.1% that economists had expected.

The strength last month came from a large 1.9% increase in output at the nation's utilities and a 0.9% increase in mining, a sector that also includes oil drilling. Manufacturing posted a more modest 0.1% rise after a decline of 0.5% in February.

"Factory output was held down by a large decline in the output of motor vehicles and parts. A shortage of motor vehicle parts that resulted from a strike at a parts manufacturer idled a number of motor vehicle assembly plants," the Fed said in the report, referring to the seven-week-old walkout at American Axle & Manufacturing Holdings.