US core consumer prices rose more than expected in June, but ground breaking for new homes slowed, according to reports on Wednesday that the inflation-wary Federal Reserve will weigh in a decision on whether to raise interest rates.
The Labour Department attributed over half of the 0.3 percent monthly advance in its core consumer price index, an inflation gauge that strips out volatile food and energy costs, to the rising cost of shelter.
It was the fourth straight 0.3 percent rise in core consumer prices, which Wall Street had expected to increase by 0.2 percent. But overall consumer prices gained 0.2 percent, as expected, as energy costs declined 0.9 percent in June.
Fed Chairman Ben Bernanke said at a congressional hearing that stubbornly high inflation could harm the US economy, but the Fed is expecting both economic growth and inflation to moderate. He said the economy appears to be "in a period of transition" to slower rates of growth and this moderation could reduce price pressures.
Bond and stock markets rallied while the dollar sold off sharply on the central bank chairman's comments. Financial markets had been divided over whether the Fed would raise rates an 18th straight time at their next meeting on August 8. The higher-than-expected rise in core consumer prices led markets to see a rate hike as a near certainty, but chances for a rate rise slipped after Bernanke's testimony.
The Labour Department report demonstrated a trend of steadily rising consumer prices in recent months. Core consumer prices have advanced at an annual rate of 2.6 percent rate over 12 months, 3.2 percent in the past six months and 3.6 percent in the past three months. It was the highest six-month rate since June 1995.
The department said shelter costs, which strip out utility and furniture prices, rose 0.4 percent in June. Rental costs rose 0.4 percent and a home-price index based on rents, called the owners' equivalent rent, also increased 0.4 percent.
Despite the rise in rents, two separate reports showed the US housing market is slowing. The pace of US home building fell more than expected in June as groundbreaking on single-family units logged the slowest pace in 1-1/2 years, a Commerce Department report showed.
June housing starts fell 5.3 percent in June to a 1.850 million unit annual pace from a downwardly revised 1.953 million unit pace in May. US single-family housing starts fell 6.5 percent to an annual pace of 1.486 million units, the slowest since November 2004.
In addition, US mortgage applications fell last week for the first time in three weeks, largely reflecting a steep drop in home purchase loans, an industry trade group said. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 4.6 percent.
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