June 18, 2013 / 1:19 PM / 4 years ago

U.S. inflation data points to firming economy

WASHINGTON (Reuters) - U.S. consumer prices rose in May and a gauge of underlying price pressures showed signs of stabilizing after a long decline, a potential comfort to Federal Reserve policymakers who would like to see stronger inflation.

A woman shops at a Walmart Supercenter in Rogers, Arkansas June 6, 2013. The annual shareholders meeting for Walmart takes place June 7, 2013. REUTERS/Rick Wilking

Other data on Tuesday showed an increase in groundbreaking at home construction sites, the latest sign America’s housing market recovery will help counter the drag on the economy this year from government austerity.

The Labour Department said its Consumer Price Index edged 0.1 percent higher last month after two straight months of declines, just below analysts’ expectations.

In a sign of stronger demand in the economy, consumer prices outside of food and energy rose 0.2 percent, just above the pace clocked in April.

These so-called “core” consumer prices, which U.S. central bankers monitor closely because they are less volatile, were up 1.7 percent in the 12 months through May. The increase last month matched April’s gains and supported the view that a worrisome downward trend in core inflation, which began a year ago, might be coming to an end.

“That does tend to lend some credence to the fact that it will be stable,” said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.

While May’s reading for 12-month core inflation remains below the Fed’s 2 percent inflation target, a stabilization could make the Fed more comfortable paring back its economic stimulus programs as soon as this fall. The Fed begins a two-day meeting on Tuesday in which it is expected to leave a bond-buying stimulus program unchanged.

“The economy has been performing decently,” said Carl Riccadonna, an economist at Deutsche Bank in New York. “I don’t think the Fed is concerned” with weak inflation data.

In May, the gain in the core price index was supported by a 0.2 percent increase in clothing prices, as well as a strong 0.3 percent increase in shelter costs.

The Fed actually targets a separate but related measure of inflation published by the Commerce Department, known as the PCE index, which has shown even weaker levels of core price increases. The PCE index puts less weight on shelter, so Tuesday’s data might not signal a similar stabilization in the core PCE index.

Investors on Wall Street appeared to largely shrug off the data.

A separate report showed U.S. housing starts rose less than expected in May, likely reflecting Labour and material constraints, although the overall trend remained consistent with strength in the housing market.

Though permits for future home construction fell, that followed a surge in April, which hoisted them above the 1 million-unit mark. The pullback last month reflected a drop in the volatile multi-family sector, but permits for single-family construction touched their highest level in five years.

The Commerce Department said on Tuesday housing starts rose 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April’s starts were revised up to show a 856,000-unit pace instead of the previously reported 853,000 units.

Economists polled by Reuters had expected groundbreaking to rise to a 950,000-unit rate last month.

Builders, who are ramping up construction to meet demand for housing against the backdrop very low inventory, have been complaining about Labour shortages and increased material costs.

Reporting by Jason Lange; Additional reporting by Lucia Mutikani and Paige Gance in Washington and by Karen Brettell in New York; Editing by Andrea Ricci

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