By Jennifer Yousfi
U.S. companies were hit with the largest annual jump in wholesale prices in 27 years during July, while housing starts dropped to their lowest level in 17 years, the latest indication that ruinous stagflation may be tightening its grip on the U.S. economy for the first time in decades.
"Inflation is way too hot and with housing way too cold, we have the opposite of a Goldilocks economy," Joel Naroff, president and chief economist of Naroff Economic Advisors, said in a note to clients after two separate U.S. government reports were released.
The Labor Department announced that the producer price index (PPI) increased 1.2% in July on a seasonally adjusted basis, after an increase of 1.8% the month prior. Even more troubling, the year-over-year increase for PPI was 9.8%, the highest level in 27 years.
"It's not a pretty number," Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, told Bloomberg News. "Today's PPI is a bit of an echo and maybe a little bit of a rude reminder of how much of a problem inflation was in July."
Even disregarding volatile food and fuel prices, so-called "core" wholesale inflation gained 0.7% in July, demonstrating that price increases are expanding beyond commodities and becoming more pervasive and widespread.
In a separate report, the Commerce Department announced an 11% decrease in housing starts, the lowest level in 17 years, with building permits seeing a similar decline.
Applications for new building permits, seen as a leading indicator of future construction, came in well-below economists expectations at an annual rate of 937,000. It was the lowest level since March 2008 and an indication that the housing market is still far from a recovery.
"It can be seen as a payback in June from the building code change in New York City. We may see another decline in August," Dana Saporta, an economist with Dresdner Kleinwort Securities LLC, told Reuters. "The underlying trend is still downward. "
While the troubling inflation number would seem to indicate an interest rate raise is called for from the U.S. Federal Reserve and Chairman Ben S. Bernanke, the housing report underscores the softening U.S. economy.
"We all know what Mr. Volcker did in 1980-1981 when inflation got out of control: He nuked the economy by driving the funds rate to 20%," said Naroff. "No one expects that to happen now, especially with commodity prices having come down quite sharply from their July highs."
The recent dollar rally-fueled pullback in commodities won't be enough to calm inflation worries, as it will likely take several months for the recent movements to lead to price declines in finished products.
A persistently weak economy will likely remain the focus for the next meeting of the Federal Open Market Committee, scheduled for Sept. 20.
News and Related Story Links:
- Bloomberg News:
U.S. Producer Prices Surge More Than Forecast in July
- The Financial Times:
US wholesale prices see sharp spike
- Money Morning:
Although Oil Prices Have Declined, the Energy Sector Remains a Global Investing Wild Card
- Money Morning:
U.S. Housing Starts Hit Two-Year Record on NY Technicality
- Money Morning:
Strong Dollar Rally Causes Gold Prices to Tumble