Inflation Falls, Housing Starts Slow Further

- The Producer Price Index for August rose .1% versus estimates of a .3% increase and a .1% gain in July.
- The PPI Ex Food & Energy for August fell .4% versus estimates of a .2% increase and a .3% decline in July.
- Housing Starts for August fell to 1665K versus estimates of 1746K and 1772K in July.
- Building Permits for August fell to 17223K versus estimates of 1739K and 1763K in July.

BOTTOM LINE: Prices paid to US producers rose less than forecast in August, and costs excluding food and energy fell by the most in three years, adding to evidence of receding inflationary pressures, Bloomberg reported. Energy prices rose .3% in August versus a 1.3% gain in July. The core ppi fell by the most since April 2003. It has risen only .9% over the last 12 months. Plunging energy prices will likely lead to a decline in the ppi next month. As I predicted several months ago, inflation is decelerating as commodities fall and growth moderates. Inflation has likely peaked for this cycle.

Housing construction in the US declined more than forecast last month to the lowest level in three years. Housing starts fell 12% in the Midwest, 6.1% in the South and 5.5% in the West. Starts rose 5.4% in the Northeast. Declining housing starts are a positive at this point as it will eventually lead to lower inventories and stabilizing prices. The Case-Shiller housing futures ticked up recently and are now forecasting a 4.9% decline in the average home price over the next 9 months. Considering the 50% rise in the average home price over the last few years, this would be considered a “soft-landing.” I continue to believe the overall negative effects housing has on the US economy are being exaggerated.