Smith Faculty Opinion Article	August 16, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

Consumer Prices Up 0.4 Percent in July Housing Starts Fall, Slowing Economic Growth, but Stock Prices Should Benefit

Today, the Labor Department reported that the Consumer Price Index rose 0.4 percent in July, after rising 0.2 percent in June.

Seasonally adjusted, food prices were up 0.2 percent in July, after rising 0.1 and 0.3 percent in May and June. Energy prices were up 2.9 percent in July, after rising 2.4 percent in May and falling 0.9 percent in June.

Energy and food prices are quite erratic month to month, and Federal Reserve policymakers pay close attention to movements in the core indexes. The Fed is particularly concerned about the pass through of higher petroleum prices into other sectors of the economy.

Core producer prices producer prices less food and energy rose 0.2 percent in July, after rising 0.3 percent the previous 4 months.

Since July 2005, core consumer prices have risen 2.7 percent, and the compound annual rate of change for the three months ending in July was 3.2 percent.

Clearly, consumer price inflation remains above Ben Bernanke's target range of one to two percent; however, the July increase was lower than for previous four months. The decline in July producer prices, less food and energy, reported yesterday indicates consumer inflation should moderate in the months ahead.

As always, the U.S. outlook for inflation is colored by global energy prices.

The crisis in Lebanon and Israel caused unwarranted panic in oil and stock markets. Spot prices for oil averaged about $70 a barrel in June and rose to about $76 by the end of the crisis. If sustained, that would have been enough to add about 15 cents to the price of a gallon of gasoline and no more than a one-time, 0.3 percent bump to the Consumer Price Index.

With the cease fire in Lebanon, petroleum prices should recede but pipeline problems in Alaska hang over the oil market. Overall gasoline prices should stabilize, and the flagging housing market poses the most important threat to economic growth.

Today, the Commerce Department reported housing 1.795 million housing starts in July, down from 1.841 million in June and from 2.070 million in July 2005. Second quarter housing starts were 8.5 percent below 2005 levels. In addition, builders are starting less expensive homes.

The slowdown in new home construction is shaving more than one percentage point off GDP growth. That should give the Fed considerable pause about pushing up interest rates further and give the stock market a lift in the months ahead.

Also, the housing slowdown will encourage households to save more and boost stock prices. Individuals will be saving and investing more, and looking for places other than real estate to place their bets. The stock market is their most logical destination.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.