Home Building Up 11.6% in May

U.S. housing starts surged last month at the fastest clip in nearly seven years, while inflation proved tame, the government said Tuesday in reports that give the Federal Reserve ample scope to delay raising interest rates.

The number of housing projects started in May rose an unexpectedly large 11.6%, the biggest monthly gain in almost seven years and an end to two straight months of declines, the Commerce Department said in one of the few recent pieces of economic good news.

“The housing market suggests the economic recovery is on track and not as weak as the [stock] market perceives it to be,” said Peter Cardillo, chief strategist for Global Partners Securities.

At the same time, consumer prices--a key measure of inflation--were unchanged in May, according to a separate report, leaving central bankers with virtually no worry of mounting price pressures after bringing key interest rates down to 40-year lows when the U.S. sank into recession.

Economists expect the Fed now will wait several more months before considering inflation-dampening rate hikes.

The economic recovery has moved in fits and starts recently, and policymakers are unlikely to want to tap the brakes until they are sure the engine has solid forward momentum.

“Inflation is not a threat at this point,” said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis. “Policymakers are going to want to make sure the economic recovery is sustainable before they raise rates.”

Consumer prices remained tightly reined last month, the Labor Department said Tuesday.

Held down in part by declining energy and food prices, the consumer price index--the most widely used inflation barometer--was flat in May after a seasonally adjusted 0.5% rise a month earlier.

Excluding volatile food and energy prices, the core CPI rose 0.2% after gaining 0.3% in April.

Groundbreaking for new homes jumped to a seasonally adjusted 1.73 million annual rate from a downwardly revised 1.55 million rate in April, the biggest climb since July 1995, the Commerce Department said.

Single-family starts--the largest category of activity--jumped 9.6%, an increase also not matched since July 1995, the department said.

Many economists had believed last year’s torrid pace of home building was set to slow, but the sector has proved more resilient than expected as mortgage rates have held below 7%, luring buyers.

“With the ongoing gloom in the stock market, I just think the perception of housing as a place to put your money has strengthened so much. If you can do it, if you can finance it, you’re going to continue to get a lot of home building,” said David Seiders, chief economist for the National Assn. of Home Builders.