Wholesale prices edge up; housing starts surge

Housing construction posted a surprisingly large increase in February, bolstered by strength in all parts of the country except the West.

The Commerce Department reported Tuesday that construction of new homes and apartments jumped 22.2 percent in February compared with January, pushing total activity to a seasonally adjusted annual rate of 583,000 units.

Meanwhile, the Labor Department reported that wholesale prices edged up a slight 0.1 percent in February as a big drop in food costs offset a second monthly increase in energy prices.

After the news, Wall Street posted gains, with the Dow Jones industrial average gaining slightly and the Nasdaq composite index rising more than 1 percent. The better-than-expected reports on housing and inflation were offset by news of a dividend cut at Alcoa Inc. and layoffs at Nokia Corp.

While the surge in housing construction was far better than the continued decline economists had expected, the rebound is likely to be viewed as a temporary gain given all the problems the housing industry still faces.

Even with the big increase, construction activity remains 47.3 percent below where it was a year ago. The strength in February was led by a big increase in apartment construction, which can be highly volatile from month to month.

All areas of the country reported an increase in February, except the West, which has been hardest hit by the current housing slump.

The 0.1 percent increase in wholesale inflation was much lower than the 0.8 percent surge in January and smaller than the 0.4 percent increase economists had expected. Compared with a year ago, wholesale prices are actually down 1.3 percent.

Core inflation, which excludes energy and food, edged up 0.2 percent in February, only slightly higher than the 0.1 percent gain economists had expected. Core prices had risen 0.4 percent in January.

Only last summer, officials at the Federal Reserve had started to worry that a surge in energy costs could spread to other areas of the economy and boost inflation to unacceptable levels. But after the financial crisis struck in the fall, the Fed switched signals and is now aggressively fighting a deepening recession with no real threat of inflation.

On Wednesday, Fed officials are expected to signal that they will continue to keep a key interest rate at a record low near zero percent for as long as necessary and use other unorthodox means to jump-start the economy.

The Fed has the leeway to focus on the weak economy because inflation pressures are expected to remain law in the face of widespread layoffs that are depressing wage demands.

The 0.1 percent rise in wholesale inflation in February reflected a 1.3 percent increase in energy prices, which have been rising for two months after having retreated for five straight months.

Gasoline prices jumped 8.7 percent in February after a 15 percent surge in January.

Food costs fell for a third straight month, dropping 1.6 percent in February, the biggest one-month decline in three years. The costs of eggs, fruits, vegetables and dairy products were all down.

Outside of food and energy, prices for cigarettes rose 2.7 percent, the biggest increase in two years, while the price of light trucks rose 1.3 percent, a gain that is not expected to last given the weakness in auto sales.

Prices for computers dropped 4.5 percent, the biggest one-month fall since January 2005.

Inflation is not expected be a problem for some time to come given the prolonged recession, which is already the longest downturn in a quarter-century. Overall economic growth fell at an annual rate of 6.2 percent in the October-December quarter and many economists expect the drop in the gross domestic product for the current quarter will be a similarly steep decline.

Many economists say the Fed will not even contemplate interest rate increases until the unemployment rate, which soared to a 25-year high of 8.1 percent in February, declines.

Companies are continuing to slash costs.

Alcoa became the latest Dow Jones industrial company to lower its dividend to conserve cash. The aluminum maker said after the market closed Monday that it was cutting its quarterly dividend 82 percent to 3 cents. It also said it plans to sell stock and debt to help reduce annual costs by more than $2.4 billion.

Nokia, the world's top mobile phone maker, said it will lay off 1,700 people worldwide to cut costs. Nokia fell 21 cents to $11.14. The mobile phone market has been suffering as consumers spend less during the recession.

(Copyright 2009 by The Associated Press. All Rights Reserved.)

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