Updated July 31 at 5:31pm

Housing, low inflation shore up expansion

Bloomberg News
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.

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ECONOMY

Housing, low inflation shore up expansion

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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 percent, less than forecast, to a 914,000 annualized rate from a revised 856,000 in April, Commerce Department figures showed last week 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 percent goal gives policymakers the leeway to address joblessness.

“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, N.C., 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.”

The Labor Department’s consumer-price index rose 0.1 percent 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 percent decrease in April.

Consumer inflation climbed 1.4 percent in the 12 months to May, less than the Fed’s 2 percent goal, after a 1.1 percent year-over-year gain in April. One reason the Fed doesn’t want inflation below 2 percent 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.

Improving property values and cheaper borrowing costs may be encouraging some Americans to buy new homes before mortgage rates head higher. The average rate on a 30-year fixed loan jumped to a 14-month high of almost 4 percent last week from a four-month low of 3.35 percent in early May, according to Freddie Mac data.

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