By Shobhana Chandra and Timothy R. Homan

Aug. 19 (Bloomberg) -- U.S. builders broke ground on the fewest new homes in 17 years and producer prices climbed the most since 1981, providing no sign of an economic recovery or easing inflation.

Housing starts fell 11 percent in July to an annual rate of 965,000, the Commerce Department said today in Washington. The Labor Department reported the producer price index jumped 9.8 percent from a year before.

``There's no doubt we're in a period of stagflation now,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who formerly worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.

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Aug. 19 (Bloomberg) -- Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

``The worst is yet to come in the U.S.,'' Rogoff, a Harvard University professor of economics, said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

The U.S. housing slump has triggered about $500 billion in credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance firms.

Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''

Last month, President George W. Bush signed into law a housing bill that provides Treasury Secretary Henry Paulson the power to make equity purchases in Fannie Mae and Freddie Mac. Paulson asked for the authority July 13 after the shares of the firms, which own or guarantee almost half of the $12 trillion of U.S. mortgages, slid to the lowest level in more than 17 years.

Shares Slump

The mortgage lenders have been battered by record delinquencies and rising losses. Fannie Mae fell 30 cents to $5.85 at 12:55 p.m. in New York Stock Exchange composite trading, its lowest level since May 1989 amid concern the government-chartered companies will fail to raise the capital they need to offset losses. Freddie Mac declined 8 percent to the lowest since January 1991.

Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. U.S. builders broke ground on the fewest houses in 17 years last month, according to a Bloomberg News survey.

Rogoff told a conference in Singapore today that the credit crisis is likely to worsen and a large bank may fail, Reuters reported earlier. He was the IMF's chief economist from August 2001 to September 2003.

``Like any shrinking industries, we are going to see the exit of some major players,'' Rogoff told Bloomberg, declining to name the banks he expects to fail. ``We're really going to see a consolidation even among the major investment banks.''

IndyMac Bancorp

IndyMac Bancorp Inc., once the second-largest U.S. independent mortgage lender, filed for bankruptcy protection Aug. 1, three weeks after it was taken over by the Federal Deposit Insurance Corp. amid a run by depositors that left it strapped for cash. Bear Stearns collapsed in March and sold itself to JPMorgan Chase & Co. for $10 a share.

``The only way to put discipline into the system is to allow some companies to go bust,'' Rogoff said. ``You can't just have an industry where they make giant profits or they get bailed out.''

Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation's financial system, said on July 8 that the central bank may extend its emergency-loan program for investment banks into next year.

Regulatory Gap

His comments followed calls by Paulson for regulatory changes that would allow financial firms to fail without threatening market stability.

Paulson has identified a legal gap that leaves unspecified how to deal with failures of companies that don't take deposits, such as investment banks. He proposed tightening supervisors' oversight of lenders and dealers while at the same time discourage companies from depending on a government rescue if their bets go wrong.

``We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,'' Paulson said in a speech in London on July 2.

In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Federal Reserve boards, and of the Treasury secretary in consultation with the president.

U.S. Recession

The world's largest economy is already in a recession, and the housing market will continue to deteriorate, Rogoff said. The U.S. slowdown will last into the second half of next year, he said, predicting a faster recovery in Europe and Asia.

The Federal Reserve, which has left its key interest rate at 2 percent after the most aggressive series of rate reductions in two decades, risks raising inflationary pressures, he said.

``Rates are too low,'' Rogoff said. ``They must realize we're going to get inflation if things stay where they are. They need to raise rates but I don't think they are going to because they're way too nervous.''

The Labor Department reports that its Producer Price Index increased by 1.2% in July and by 9.8% in the past year.

NEW YORK (CNNMoney.com) -- In another indication of growing inflation, wholesale prices increased in July to the highest annual rate in 27 years, according to a government report released Tuesday.

The annual Producer Price Index for finished goods rose 9.8% in the 12 months that ended in July.

The jump in wholesale prices is the fastest rate of increase since a 10.4% bump-up in June 1981, according to Joseph Kowal, economist at the Bureau of Labor Statistics.

The Labor Department also reported that PPI rose 1.2% in July, after increasing 1.8% in June. Analysts polled by Briefing.com had expected an increase of only 0.6%.

The surge in producer prices is in large part due to higher energy prices, said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com.

Crude oil prices doubled in the 12 months through July, but have since fallen nearly 24% from their peak hit last month.

The latest PPI report doesn't reflect the recent drop in crude prices, but Roberts expects future readings to ease.

"The topline is a bit behind the curve - that will fall in the future," he said. "Right now, it has not really taken into account the recent decrease in energy prices."

Core inflation: The so so-called core PPI number, which excludes food and energy prices, rose by 0.7% - more than the 0.2% increase analysts had expected.

The core inflation index is "the more long term rate" because it indicates how much inflation "is seeping into the economy" beyond the volatile energy prices, said Roberts.

The index for finished goods other than foods and energy has advanced by 3.5% in the past year, according to the report.

Food and energy: The indexes that measure producers' food and energy prices increased in July, but at a more moderate pace than in the previous two months.

Energy prices rose by 3.1%, after a 6.0% jump in energy prices in June and a 4.9% jump in May. In the 12 months through July, prices for finished energy goods have surged 28%.

Food prices rose by only 0.3% in July, after increasing by 1.5% in June and 0.8% in May. In a year-over-year comparison, prices for finished consumer foods have increased by 8.7%, according to the report.

The much more moderate increase in food prices in July compared with June is the one bright spot in the otherwise glum inflation report, according to Roberts.

Even though energy prices in July were still on the rise last month, "if you are seeing the other big component of inflation go down a bit, that could indicate a positive for the future," he said.

The government reported last week that the the Consumer Price Index jumped by 0.8% in July, which was twice the increase that economists had expected. 

Gold price fall seen set to revive Indian imports

Tue Aug 19, 2008 4:01pm IST

By Biman Mukherji and Arpan Mukherjee

NEW DELHI/MUMBAI, Aug 19 (Reuters) - Indian jewellers are paying gold importers more than double last month's premiums as they scramble to meet a resurgence in demand stoked by a steep fall in global prices and the approach of the Diwali festive season.

The rise in premiums suggests a jump in imports by the world's top buyer, where stocks had fallen earlier this year after dealers, bankers and jewellers slashed purchases on signs that record-high prices had crimped demand.

Premiums paid to importers have more than doubled to about $1.80 per kilogram from 80-85 cents last month, dealers said.

India imported about 30 tonnes in July, a drop of nearly 56 percent from a year earlier, and imported 24 tonnes in June, data from the Bombay Bullion Association showed. The World Gold Council said India's total gold demand fell 47 percent on the year in Jan-June to 263.5 tonnes.

"Gold imports this month will be close to 50 tonnes," said Harish Galipelli, head of research at brokerage Karvy Comtrade.

But Daman Prakash, a Chennai-based bullion dealer and member of the Tamil Nadu Bullion Forum, was more bullish. He reckons imports could surpass last August's 79 tonnes, the highest for 2007.

International gold prices <XAU=> tumbled by more than a fifth last week to below $800 an ounce, after hitting a four-month high of $987.75 in mid-July and a record $1,030 in March.

Local demand for the precious metal picked up after domestic prices fell below 13,000 rupees ($300) per 10 grams from a record above 13,800 rupees in mid-July. Spot gold INBULL03 was trading at 11,228 rupees per 10 grams on Tuesday, according to Punjab National Bank.

Analysts said wholesale dealers were unlikely to drop their prices significantly as the festival season got under way, but the high premiums were not deterring buyers.

Ranjeet Kumar Chaubey, deputy manager and dealer at state-run Punjab National Bank said the bank had three to four clients with no stock waiting for gold at different locations.

"My clients are ready to pay any premium," Chaubey said.

The premium in the southern city of Chennai has almost quadrupled to 40 rupees per gram from 10 to 12 rupees normally.

"Some jewellers are even willing to pay a premium of up to $2 a kilogram," said a bullion dealer at a leading Indian bank who did not want to be identified. "But we don't have the stocks."

The delivery time for gold jewellery has gone up to a week in many regional markets from just one day last month, and analysts and dealers expect supply to remain tight this week at least and beyond if world prices fall further.

Prakash in Chennai said due to falling demand earlier in the year, refiners had geared down production and were not able to ramp it up rapidly.

"Banks are not in a position to source materials from refiners immediately, which entails a delay of five to six days," he said.

Krishna Kumar Nathani, managing director of consultancy Indiabullion.com, agreed: "There is no ready delivery of gold available, for love or money." 

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