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Consumer prices creep up
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May 16, 2001: 10:57 a.m. ET
Mild price data may ease inflation fear; housing starts inch up as expected
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NEW YORK (CNNfn) - Consumer prices rose in April, the government said Wednesday, but more slowly than analysts expected, easing some fears about the risk of inflation in the United States economy.
The CPI, the government's main inflation gauge, rose 0.3 percent in April after rising 0.1 percent in March, the Labor Department reported. Analysts polled by Briefing.com expected a 0.4-percent rise. Excluding often-volatile food and energy prices, the "core" CPI rose 0.2 percent, matching forecasts.
"One month doesn't make a story," said Anthony Chan, chief economist with Banc One Investment Advisors. "But it's certainly very encouraging, especially with the market worried about inflation."
In a separate report, the Commerce Department said housing starts continued to be a bright spot for the economy, rising 1.5 percent to a 1.609 million annual rate last month, matching forecasts, after posting a 2.3 percent drop in March, when the revised estimate was 1.586 million.
The news came one day after Federal Reserve policy makers cut interest rates to give consumers and businesses easier access to credit and boost the ailing U.S. economy.
Some observers have worried the Fed's aggressive rate-cutting this year – it's made five cuts, slashing rates from 6.5 percent to 4 percent, the lowest rate since 1994 -- increases the risk of inflation as more cash is pumped into the economy.
Wednesday's CPI numbers could ease that fear and give the Fed wiggle room for its next rate-setting decision, likely to come when policy makers meet again on June 26-27.
"This gives the Fed license to continue executing monetary policy," Chan said. "If they see any signs of slow growth in employment, industrial production, or retail sales, they certainly have the green light to make another cut. They have total flexibility to do whatever it takes to prevent a recession."
Especially encouraging to Chan and other economists is the fact that much of the increase in prices was attributable to volatile energy prices, which rose 1.8 percent. Gasoline prices rose 5 percent, but fuel oil and natural gas prices tumbled.
Transportation and recreation costs also saw relatively big gains of 0.9 percent each, with higher baseball ticket prices responsible for much of the gain in entertainment prices. The category called "other goods and services" rose 1.3 percent, led by a 4-percent gain in tobacco products.
Keeping an eye on prices
U.S. Treasury bond prices rose after the report eased trader's fears about inflation, which can erode the value of long-term investments in government bonds. Stocks dipped at the open, but then rallied later in the morning.
Though the CPI data were relatively benign, inflation still could become a problem, analysts said, and the Fed will have to keep an eye on prices going forward.
"There is more bad news to come in May," said Stephen Stanley, senior market economist with Greenwich Capital Markets, said. "Gasoline will be up sharply, and tobacco will be up."
Other analysts think the inflation risk will increase as economic growth recovers later this year and into the next.
"I think basically investors can't take their eyes off the inflation data, but it's of lower concern in the market and to the Fed," said Nat Paull, senior portfolio manager with New Amsterdam Partners. "I think inflation will be the worry of 2002 after growth starts to pick up again."
Housing slowdown ahead?
Lower interest rates have been a boon to home builders and home buyers alike, and home sales have been one of the few bright spots in the economic slowdown.
But, while housing starts were strong in April, building permits, a gauge of sentiment among builders about the economy in the months ahead, fell 2.5 percent in April to a seasonally adjusted rate of 1.587 million after posting a 2.2 percent loss in March, when the revised estimate was 1.627 million.
And housing starts are 1.0 percent below the level seen in April of last year, when the revised rate was 1.626 million.
"Unemployment rates are still low enough to support growth in the housing market," said Asha Bangalore, economist with Northern Trust Co. "You have to start doubting the trend going forward because of the weakness in the employment numbers." 
- from staff and wire reports
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