Consumer prices rose in May by the most in more than a year, showing U.S. companies are gaining some pricing power as the economy strengthens, and the homebuilding industry stabilized after a first-quarter swoon.
The cost of living increased 0.4 percent, the biggest advance since February 2013, according to Labor Department data released today in Washington. Other figures showed builders broke ground on 1 million homes at an annualized rate after 1.07 million in April, the best two-month reading since late 2013.
The reports will be welcome news to Federal Reserve policy makers meeting today and tomorrow as the pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth. Central bankers are projected to continue scaling back their bond-buying program, while an increase in interest rates is delayed until well into 2015.
“Inflation in the U.S. is in a sweet spot – it’s not too hot, it’s not too cold,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who projected a 0.3 percent increase in consumer prices. “The disinflationary stress that we’ve had over the past two or three years has effectively ended. That’s the big story here.”
Treasury securities dropped, pushing the yield on the benchmark 10-year note up to 2.64 percent at 11:41 p.m. in New York, compared with 2.60 percent at the close yesterday. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,938.51.
Last month’s increase in consumer prices exceeded all estimates in the Bloomberg survey, which ranged from no change to a 0.3 percent advance. The median forecast called for a 0.2 percent increase.
Costs rose 2.1 percent over the past 12 months, the most since the year ended October 2012, after a 2 percent gain in April.
The number of housing starts last month was in line with the median forecast of economists surveyed by Bloomberg that projected a 1.03 million reading. April’s rate was the strongest since November, the report from the Commerce Department showed.
Permits, a proxy for future construction, decreased 6.4 percent to a 991,000 annualized rate. They were projected to fall to a 1.05 million pace, according to the survey median.
The drop was all centered in multifamily projects, which tend to be volatile from month to month. Applications to begin work on single-family homes, which make up the biggest share of the market, rose 3.7 percent to the highest since November.
A strengthening job market and a retreat in mortgage costs in recent weeks are helping support residential real estate following a lull in building in early 2014 when frigid temperatures prevented builders from breaking ground. Faster sales will prompt developers to step up construction, given supplies of homes on the market remain lean and property values are rising.
“Housing is going to continue to gather steam as we go through the balance of the year,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who forecast 1 million starts. “If housing is better, more people are working. If more people are working, you have knock-on effects on other demand components. It’s another oar in the water for the U.S. economy.”