EYE ON AMERICA
All eyes on jobs, wages
By Peter Morici
On Wednesday, the US Labor Department reported that the Consumer Price Index
(CPI) rose 0.6% in April on a seasonally adjusted basis, as energy prices
surged 3.9%. The consensus forecast was 0.5%, and my forecast published by
Reuters was 0.8%.
Seasonally adjusted food prices were flat in April. This was in line with the
0.1% increase in April wholesale prices reported on Tuesday. From month to
month, food prices often fluctuate, but
inflationary pressures from food prices should be moderate through the summer.
Core producer prices - producer prices less food and energy - rose 0.3% in
April. The consensus forecast and my forecast were 0.2%, as core inflation
surged more than economists expected. The core rate was up 0.3% in March too.
Core inflation was up in both March and April, and this is a red flag for the
Federal Reserve. The Fed is now more likely to raise interest rates again in
June.
The Producer Price Index data released on Tuesday indicate core inflation
should moderate. Producer prices for non-energy consumer goods increased only
0.1% in April, but the CPI covers a broader range of consumer spending. In
particular, the CPI includes medical services and education where inflation
seems little constrained by market forces.
The outlook for inflation is significantly colored by energy prices.
Gasoline prices surged in April. The average retail price of gasoline in April
was US$2.79 per gallon (73.7 cents a liter), up from $2.47 in March. By this
Monday, it hit $2.99. Gasoline prices are likely to go higher through the
spring and summer driving season, and significantly burden economic growth.
Diesel prices are surging too. Diesel prices rose from $2.56 per gallon (67.6
cents a liter) in March to $2.73 in April, and reached $2.92 on May 15.
Productivity growth remains solid. Until recently, these gains have permitted
producers of most final goods and services to absorb higher fuel prices and
wage increases without pushing up consumer price inflation, and to enjoy strong
profits. The recent moderation in non-energy producer prices indicates those
conditions persist and the recent surge in nonenergy consumer prices should
subside.
Inflation, outside the energy sector, is likely to moderate, and the outlook
for core consumer prices is guarded but remains favorable.
Overall the economic news is pulling the Fed policymakers in two directions.
Core wholesale price inflation is under control, productivity growth remains
robust, and a flagging housing market and moderating retail sales indicate the
economy is cooling. However, core consumer prices surged in March and April,
industrial production has been advancing smartly and capacity utilization is at
its highest level since July 2000.
The May jobs and wage data could prove critical. April jobs growth was
disappointing but wage increases were unusually strong. Both figures were
likely aberrations, and the May figures should reflect a regression to the
mean. However, if both jobs and wages increase significantly in May, the
balance of data will tip in favor of another interest rate increase in June.
With the broader indexes of inflation driven higher by surging petroleum
prices, the Fed will watch the jobs and labor cost data closely and want to
make sure core inflation does not get out of control.
On the basis of the data we have to date, look for the Fed to push the Federal
Funds rate to 5.25% in June.
Peter Morici is a professor at the University of Maryland's Robert H
Smith School of Business, former chief economist at the US International Trade
Commission, and a commentator on economic and political issues.
(Copyright 2006 Peter Morici. Used with permission.)
