Prices Americans paid for goods and services rose 0.4 percent in January as surging energy costs contributed to the largest monthly increase in inflation in more than two years, Labor Department figures showed.
At the same time, home resales fell for the fourth consecutive month, suggesting that low mortgage rates aren’t enough to overcome prospective buyers’ concerns about the slowing economy.
Separately, the Commerce Department reported that the U.S. merchandise trade deficit rose 5.0 percent last year to a record $174.5 billion, although exports showed strong growth in the later half of the year.
Adding to the glum news issued this week, government figures showed stockpiles of unsold goods at U.S. businesses shrank 0.5 percent in December. It was the first decline in almost two years, an indication that companies ratcheted down their production in anticipation of weak Christmas sales.
January’s home resales decline was a larger-than-expected 4.1 percent last month to an annual rate of 3.71 million, National Association of Realtors figures showed. The figures are based on actual closings. Sales declined in all regions of the country, with the largest decline was in northeastern states.
Weak sales were fanned by “bad weather on the East Coast and the government shutdown, even though mortgage prices are very attractive,” according to Asha Bangalore, an economist at Northern Trust Co. in Chicago.
In December, resales fell 3.2 percent to an annual rate of 3.87 million, trimming the sales rate to its slowest pace since last June.
Total home resales for all of last year were 3.802 million, down 3.6 percent from 1994’s total. For all of this year, the realty group is projecting home resales will rise 1.3 percent above 1995 to an annual rate of 3.851 million.
The realty group’s report is significant because previously occupied homes account for about 85 percent of all U.S. home sales.
Low mortgage rates have been helping housing this year even as other segments of the economy struggle. The average 30-year mortgage rate rose to 7.32 percent last week from 6.94 percent the previous week after Federal Reserve Chairman Alan Greenspan suggested the economy is on the mend after a winter slowdown.
In January, though, the average rate on a 30-year fixed loan declined to 7.03 percent from 7.20 percent in December.
The realty group said the average price for a home rose 0.8 percent to $114,800 in January from $113,900 in December. By region, January home resales fell 6.8 percent in the northeast. Sales fell 3.5 percent in the south, 3.5 percent in the west, and 4.0 percent in the midwest.
Taken together, the reports raise new questions about whether the Federal Reserve will cut interest rates at a March 26 policy meeting, analysts said. “If the Fed has to choose between sluggish growth and higher inflation, they will sit on their hands” at the next meeting, said Cary Leahey, an economist with Lehman Brothers.
Still, analysts note that government inflation statistics tend to be highest in the early months of the year. “The outlook for inflation is slightly higher than last year, but not high enough” to upset financial markets, said Patrick Retzer, director of fixed income at Heartland Advisors in Milwaukee, which manages $300 million in bonds.
Moreover, labor costs remain little changed. Average weekly earnings adjusted for inflation fell by 1.7 percent in January as bad weather limited the number of hours worked, Labor Department figures showed. For all of last year, this measure of real earnings fell by 0.3 percent–meaning workers didn’t even keep up with the subdued rate of inflation for the year.
In its inflation report, the Labor Department reported that energy prices rose 1.9 percent last month as demand for home heating oil and gasoline pushed prices higher.
Even disregarding often-volatile food and energy costs, the consumer price index, or CPI, rose 0.3 percent in January. The finding, coming a day after the government reported little change in producer prices, suggests the consumer inflation outlook may not be as benign as previously thought.
For all of 1995, consumer prices rose just 2.5 percent. Most analysts are expecting inflation to remain subdued this year.
When the Fed last week issued its latest economic assumptions report, it forecast the CPI will increase between 2.75 percent and 3.0 percent this year. If the central bank is right, 1996 would be the fifth straight year in which prices rose less than 3 percent.
“The years ahead should see further progress against inflation and the eventual achievement of price stability,” when costs for goods and services barely budge, Greenspan told Congress in his semiannual economic report.
The latest inflation report also that retail food prices, which make up 16 percent of the index, increased 0.1 percent last month, as lower prices for fruits, vegetables, beef and pork offset higher poultry costs. Clothing costs rose 0.7 percent.
Commodity prices have risen in the weeks since the Labor Department collected its statistics for January. The Goldman, Sachs & Co. commodity index, which measures energy, agriculture, industrial and metals prices, has risen about 1.2 percent since Jan. 31.
Yet goods prices are only part of the CPI. Service costs, like medical bills and college tuition fees, make up 55 percent of the CPI, and there’s “some resistance on the part of consumers to accept large increases in the price of services ranging from transportation to education to hotels to medical care,” said Lynn Reaser, chief economist with First Interstate Bancorp in Los Angeles.
Last month, medical costs rose 0.4 percent, and entertainment and housing costs both increased 0.3 percent. Transportation costs rose 0.7 percent, though airline fares fell 0.9 percent. Auto finance charges, meantime, fell 2.5 percent.
