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Financial Times: US data fuel stagflation fears

By Daniel Pimlott in New York
Published: February 26 2008 23:18 | Last updated: February 26 2008 23:18

A sharp drop in US consumer confidence, to its lowest level since the beginning of the Iraq war in 2003, and a jump in inflation among producers highlighted the deepening risk of stagflation, figures released on Tuesday showed.

Separately, data on house prices and foreclosures showed that the housing market continued to plumb record lows at the end of last year and the beginning of this year.

The consumer confidence index fell to 75 in February from 87.3 in January, the worst reading in five years, according to figures from the Conference Board. Consumers’ perspective on current situations fell to its most downbeat since October 2001, during the last extended period of contraction in US economic growth, while future expectations hit their worst level since 1991.

“The weakening in consumers’ assessment of current conditions, fuelled by a combination of less favourable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggests that the pace of growth in early 2008 has slowed even further,” said Lynn Franco, director of the Conference Board’s consumer research centre. “With so few consumers expecting conditions to turn around in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase.”

As well as a sharp deterioration in consumer confidence, a 7.4 per cent rise in producer prices was the largest year-on-year increase since 1981.

Overall finished goods prices were pushed up by large increases in food and energy costs, while core finished goods prices recorded their largest rise since last February.

The rising prices are a major risk as the Federal Reserve cuts interest rates to try to avoid a deep US recession.

“The chairman will need to gingerly navigate the waters of appearing focused on the risks facing the economy while not appearing too glib with regard to the obvious inflation threat that the Fed now faces,” said analysts at Action Economics.

Data on housing from the closely watched S&P/Case- Shiller index showed a dramatic decline in home prices last year. Prices fell in every one of the 20 biggest US cities and were on average 9.1 per cent lower in December than a year earlier. “We reached a sombre year-end for the housing market in 2007,” says Robert Shiller, who compiles the report.

Part of the reason for the speed of the decline has been the soaring numbers of foreclosures. Repossessions by banks in January were up 90 per cent compared with the year before, Realtytrac, a research company, said.

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