Many economists are worried that the housing bust, which followed a five-year boom, could be a prolonged one as sellers struggle to reduce record levels of unsold homes.
On Thursday, a real estate trade group reported that the slump in housing deepened in the final three months of last year. The National Association of Realtors said that sales of existing homes fell in 40 states and home prices dropped in 49% of the metropolitan areas surveyed, the widest price decline in the history of the Realtors' survey.
The 0.6% fall in the Producer Price Index and the moderate 0.2% rise in core prices were right in line with economists' expectations.
Bernanke Sees Inflation Easing
Federal Reserve Chairman Ben Bernanke told Congress this week that the central bank believed inflation pressures would gradually recede over the coming two years as the economy expands at a moderate pace.
Many private economists believe the central bank is close to achieving its hoped-for soft landing in which growth slows enough to keep inflation contained without pushing the country into a recession.
However, there are risks, with one of the largest being the impact the housing slump will have on the overall economy. In the last half of 2006, the housing slowdown trimmed overall economic growth by more than a full percentage point.
The 0.6% fall in wholesale prices in January followed sizable increases of 1.8% in November and 0.9% in December, reflecting a jump in energy prices in those two months.
Energy prices soared in 2006, pushing gasoline pump prices briefly above $3 per gallon last. But economists believe energy costs will be better-behaved in 2007, noting that oil prices, which rose to record levels above $77 per barrel, are now trading below $60 per barrel.
Food Costs Rise
Food costs rose 1.1% in January following an even larger 1.5% gain in December. The big increases last month were in the price of fish, chicken and beef. The cost of fruits and vegetables fell.
The 0.2% rise in core inflation, which excludes food and energy, followed a similar increase in December.
The price moderation last month reflected a big decline of 1.4% in the cost of light trucks, a category which includes sport utility vehicles, and a smaller 0.1% drop in new car prices. U.S. automakers are struggling to reduce an overhang of unsold cars, reflecting weaker demand following last year's surge in gasoline prices.
The PPI report showed that cigarette prices jumped by 1.8%, the biggest increase in two years, while the cost of pharmacy products rose by 1.3%, the biggest increase since last May.