Core Inflation Decelerates, Housing Starts Rise, Industrial Production Fall, Capacity Utilization Declines

- The Consumer Price Index for March rose .6% versus estimates of a .6% gain and a .4% rise in February.
- The CPI Ex Food & Energy for March rose .1% versus estimates of a .2% gain and a .2% rise in February.
- Housing Starts for March rose to 1518K versus estimates of 1495K and a downwardly revised 1506K in February.
- Building Permits for March rose to 1544K versus estimates of 1510K and 1532K in February.
- Industrial Production for March fell -.2% versus estimates of unch. and a downwardly revised .8% increase in February.
- Capacity Utilization for March fell to 81.4% versus estimates of 81.9% and a downwardly revised 81.6% in February.

BOTTOM LINE: A measure of prices paid by US consumers rose less than forecast last month, supporting the Fed’s call that inflation will subside, Bloomberg reported. The .1% rise in core prices was the smallest gain this year. The CPI year-over-year for March rose 2.8% versus the 20-year average of 3.1%. Energy prices rose 5.9%, the largest increase since the months during the hurricanes in 2005. However, the cost of hotel stays fell 2.3%, the biggest drop since September 2005. As well, clothing prices fell 1%, the most since April 2001. I continue to believe inflation is not and will not become a problem. I also still expect a modest bout of deflation from Asia during the next meaningful global economic slowdown. This is why I believe long-term rates remain stubbornly low and gold falls on any signs of emerging market weakness.

Housing starts in the US unexpectedly rose for a second month in March, bolstering expectations the housing slump may be easing, Bloomberg reported. Historically warm temperatures in March prompted builders to increase starts, along with signs that demand is firming as prices stabilize. Starts soared 45% in the Midwest. Starts fell 7.7% in the West, 6.1% in the Northeast and 2.7% in the South. I continue to believe housing construction will not add to overall US economic growth this year as builders continue to reduce inventories.

Industrial Production in the US declined last month as warm weather reduced electricity demand, Bloomberg reported. Manufacturing production increased on higher demand for business equipment such as computers, while warm weather cut heating demand. Factory production, which comprises about four-fifths of the report, gained .7%, the highest this year. Utility production fell 7% after rising 7.6% in February. The decline in capacity utilization and downward revision for the prior month is a big positive on the inflation front. I suspect industrial production will surge next month on inventory rebuilding and increased utility production.