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August 19, 2008
Wholesale Inflation Way Up
The high price of fuel is beginning to really hurt wholesale prices as the index shot up another 1.2% last month which pencils out to a rate of 9.8% over the last year:
Today's report follows recent news that consumer prices are also rising faster than expected -- and faster than the Federal Reserve's generally accepted target rate of around 2 percent. Although wholesale inflation does not necessarily translate into higher consumer prices, it can be evidence of things to come.So far, however, the Fed has not reacted to those inflation reports by raising interest rates, out of concern that higher borrowing costs would further slow the economy. With oil prices in particular falling from recent record highs, there is hope that upcoming reports will show price increases slowing.At the same time, other government data brought more bad news for the housing industry. Housing starts in July fell an additional 11 percent compared to the month before, and housing permits -- a gauge of future construction activity -- dropped nearly 18 percent.
While the trend continues downward on housing starts, the real indicator that we should be watching is home value. Until the price of housing stabilizes, a recovery in the market is not in the cards. Builders are not going to construct homes that will be worth less when they are done and homebuyers are not going to purchase a home that will be worth less a year from now.
According to some analysts, home prices may steady by the end of the year and show a small uptick in the first quarter. That would be welcome news for the entire economy since a large slice of the economic pie is devoted to the housing market.