Finance news. My opinion.

The worst U.S. housing slump since the Great Depression is just starting to make its mark on inflation, indicating the Federal Reserve can maintain its monetary stimulus well into 2010, economists said.

The price of renting a house or apartment, which accounts for 30 percent of the cost of living, was unchanged last month, according to the Labor Department’s report on consumer prices issued today in Washington. One measure designed to track the value of owner-occupied houses rose the least over the past 12 months since records began in 1982.

The real-estate decline that started more than three years ago is likely to keep pushing up foreclosure and vacancy rates, which are already at record levels. The glut of properties will continue to pressure rents and limit inflation, giving Fed policy makers more time to remove the $1 trillion they’ve injected into the banking system.

“The Fed keeps the spigot wide open” at least through the middle of next year and maybe into 2011, said Donald Ratajczak, chief consulting economist at Morgan Keegan Inc. in Memphis, and a former director of the Economic Forecasting Center at Georgia State University, where he won acclaim for his inflation forecasts in the 1990s.

The cost of living was unchanged in July and dropped 2.1 percent from a year earlier, the biggest 12-month decrease since 1950, today’s Labor Department report showed. Excluding food and energy costs, the so-called core consumer-price index increased 1.5 percent from July 2008, the smallest gain since February 2004.

‘New Dimension’

“There is a risk that sometime in the next few months, you could see a negative print on core CPI,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and a former Fed economist.

“The debate on the Fed will take on a whole new dimension,” Feroli said. “Now people will say, even with growth, the Fed will be a little bit leery here of deflation risks and will want to keep accommodation longer than is priced in the market.” Deflation is a persistent drop in prices that hurts the economy by making debts harder to pay and eroding corporate profits payday loans.

Rents, which make up almost 40 percent of the core CPI, have played a leading role in that deceleration. A measure known as owners-equivalent rent, an imputed value for owner-occupied homes that accounts for almost the entire category, rose 1.7 percent in the 12 months that ended in July, the smallest gain since records began almost three decades ago.

Actual home and apartment rents, the smaller category, rose 0.4 percent during the last six months, the least since August 1963.

Record Vacancies

Indications are that the pressures will intensify in coming months. Rental vacancy rates climbed to 10.6 percent in the second quarter, the highest level since record-keeping began in 1956, according to figures from the Census Bureau.

A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac Inc. One in 355 households got a filing, the highest monthly rate in RealtyTrac figures dating to January 2005, the Irvine, California-based company said.

Fed policy makers who met in Washington this week said that excess capacity would probably keep inflation “subdued for some time.” Investors are betting central bankers will start raising rates in the first half of 2010, according to futures trading on the Chicago Board of Trade.

Not all economists are as sanguine as the central bakers about the outlook for prices.

“It might be time to start pushing the panic button on deflation risk were it not for signs that the U.S. economy has bottomed,” David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said today in a note to clients. “We expect core inflation to level off later this year,” he said, because reductions in spare capacity are more important in determining price trends than the amount of the excess.

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