Wholesale prices surge; Housing rebound

Wholesale prices surged in November by the largest amount in more than three decades, led by huge increases in the cost of gasoline and new cars and trucks.

The Labor Department reported Tuesday that wholesale prices jumped 2 percent last month, the biggest advance since a similar 2 percent increase in November 1974, back during a decade when repeated oil shocks sent inflation spiraling.

Analysts, however, dismissed the latest increase as a one-month aberration. They still believe the inflation threat that gripped the country earlier this year is beginning to ease.

"The headline number looks scary but the reality is that inflation is moderating," said Mark Zandi, chief economist at Moody's Economy.com.

In other economics news, the Commerce Department reported that housing construction rose by 6.7 percent to a seasonally adjusted annual rate of 1.588 million units.

However, as with the inflation report, analysts said the overall number was misleading and not an indication that the severe slump in housing was coming to an end.

They noted that the rebound followed an even bigger 13.7 percent drop in October. Even with the November gain, housing construction was 25.5 percent below the level of a year ago.

And applications for building permits, considered a good indication of future construction activity, fell for a 10th consecutive month, dropping 3 percent to an annual rate of 1.506 million units.

"Great weather and an abysmal October probably played more of a role in the construction rebound than a firming of the market," said Joel Naroff, chief economist at Naroff Economic Advisors.

On Wall Street, investors dismissed the bad inflation report to push stock prices to another record. The Dow Jones industrial average rose 30.05 points to a record close of 12,471.32, eclipsing the previous peak set last Friday.

Zandi said he believed the country was about two-thirds of the way through a severe housing correction that has already lowered overall economic growth by more than 1 percentage point. The correction has forced builders to lay off thousands of construction workers and offer attractive incentives to move homes already built.

"Most of 2007 will be another tough year for anyone in the housing industry," he said.

Economists had been expecting an increase in wholesale prices following two months of big declines. However, the 2 percent jump was four times bigger than the 0.5 percent increase they had forecast. Even excluding volatile energy and food prices, core inflation posted a 1.3 percent advance, the biggest jump in 26 years.

But analysts said last week's report on consumer prices was a much better indication of where inflation is headed. Prices at the retail level were flat in November, the third straight month of price relief for consumers.

The big difference in the two reports was energy costs, which fell in the consumer survey but were up 6.1 percent in the November survey of wholesale prices.

The rise in wholesale energy costs was led by a 17.9 percent jump in gasoline prices, the biggest increase since June 2000. Natural gas for home use, home heating oil and diesel fuel costs all posted big gains at the wholesale level as well.

The other big mover was a rebound in the price of new vehicles. The category of light trucks, which includes sport utility vehicles, surged by a record 13.7 percent, and new car prices were up by 2.2 percent.

The motor vehicle price increases will be reversed, given the continued weakness in sales, economists said.

Federal Reserve officials last week left interest rates unchanged at their final meeting of the year, but said they continued to be worried about inflation pressures. The Fed, which had raised rates for two years as a way of slowing the economy and keeping inflation contained, has been on hold since its last rate hike in June.

Analysts said the Fed could start cutting rates by mid-2007 to make sure the slowdown, led by weakness in housing and auto sales, does not worsen into a recession.

Food costs showed a small 0.1 percent rise last month after a big 0.8 percent decline in October as increases in the price of dairy products, eggs and soft drinks offset declines in vegetable and fruit prices.

The 1.3 percent rise in core wholesale inflation, which excludes energy and food, followed a big 0.9 percent drop in October and was the biggest one-month gain since a similar 1.3 percent rise in July 1980.

By region of the country, housing construction was up 18.5 percent in the South and 8.6 percent in the Northeast. Construction fell by 8.1 percent in the West and 6.3 percent in the Midwest.

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On the Net:

Wholesale inflation: http://www.bls.gov/ppi

Housing construction: http://www.census.gov/newresconst