Jan. 20, 2010 – 7:45 a.m.

Inflation Benign, Housing Activity Weak

The Producer Price Index (PPI) edged up 0.2% in December on higher food prices, while energy prices receded for the month. Prices excluding food and energy were flat, and core price levels for the year were negligible, rising less than one percent from a year ago.

Separately, housing starts moderated again in December to a 557,000 unit rate-off four percent from November. The slowdown in construction activity in the fourth quarter represents a reaction to unseasonably bad winter weather and the pullback we saw when buyers thought the first-time buyer tax credit would expire. An extension to that tax credit, coupled with a significant INCREASE in building permits for the month, suggest that this moderating trend will reverse in the first quarter. Moreover, mortgage applications surged in the week ending January 15, suggesting that buyers have returned to the market.

The Bottom Line: The Fed should feel justified in staying the course and stimulating the economy, given the huge role that the government is still playing in supporting demand-particularly in the housing market. The plan is to stop buying mortgage-backed securities at the end of March. The probability of that occurring, however, continues to diminish. The Fed just can't risk a setback going forward-particularly in the fragile housing market.

On the brighter side, the less we build, the less the overhang in unsold and vacant homes that will be on the market this spring. That will eventually help to stabilize housing prices.

© 2010 Mesirow Financial Holdings, Inc. ("Mesirow Financial"). All rights reserved.

The information in Diane Swonk's Fed Flash is the proprietary and copyrighted material (the "Copyrighted Material") of Mesirow Financial. The Copyrighted Material, or any portion thereof, may not be reproduced, retransmitted or submitted to any media outlet, or posted on any Web site aside from mesirowfinancial.com without the express written consent of Mesirow Financial. This information provided here in is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic or other decisions. The views expressed herein are those of the author and may not necessarily represent the views of Mesirow Financial, its operating businesses or other of its employees. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.