Housing shores up expansion with little inflation

Builders began work on more U.S. houses in May and permits for new single-family homes rose to a five-year high as residential real estate underpins an economy that’s generating little inflation.

Housing starts climbed 6.8%, less than forecast, to a 914,000 annualized rate from a revised 856,000 in April, Commerce Department figures showed today in Washington. Applications for one-family home construction increased to a 622,000 pace, the fastest since May 2008. Data from the Labor Department showed May consumer prices rose less than projected.

Building permits that exceed the pace of ground-breaking signal further construction gains that will propel growth as manufacturing cools and federal budget cuts take hold. Inflation below the Federal Reserve’s 2% goal gives policy makers the leeway to address joblessness as they consider at their meeting today and tomorrow when to dial down record monetary stimulus.

“The housing recovery is still very much on track, and we’re going to see stronger activity in the second half of the year,” said Mark Vitner, an economist in Charlotte, North Carolina, at Wells Fargo Securities LLC, a unit of the top U.S. mortgage lender. “I think a lot of people have been looking at the stimulus by the Fed and expecting inflation to pick up. To have inflation you have to have stronger economic growth.”

Stocks advanced for a second day, pushing the Standard & Poor’s 500 Index to its highest since May 30, as investors awaited the outcome of the Fed’s policy meeting for clues to the central bank’s plan for stimulus. The S&P 500 increased 0.8% to 1,651.81 at the close in New York.

Consumer Prices

The Labor Department’s consumer-price index rose 0.1% in May, restrained by the first decrease in the cost of food in almost four years. The gain in the cost of living was the first in three months and followed a 0.4% decrease in April.

Consumer inflation climbed 1.4% in the 12 months to May, less than the Fed’s 2% goal, after a 1.1% year-over-year gain in April. One reason the Fed doesn’t want inflation below 2% is it raises the risk that an unexpected shock could tip the economy into deflation, or a persistent decline in prices that is hard to reverse.

A recession in Europe and slower growth in emerging markets such as China, combined with restrained wage gains in the U.S., have made it difficult for companies to raise prices.

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