EYE ON
AMERICA Stagflation becomes a
danger By Peter Morici
On Wednesday, the Labor Department
reported that the Consumer Price Index rose 0.4%
in May on a seasonally adjusted basis, as energy
prices surged 2.4%. The consensus forecast was
0.5%, and my forecast, published by Reuters, was
also 0.3%. Seasonally adjusted, food prices were
up 0.1% in May after virtually no change in April.
Wholesale prices for food fell 0.5% in May and
rose only 0.1% in April, indicating inflationary
pressures from food prices should be moderate
through the summer.
Energy and food prices
are quite erratic month-to-month, and policymakers
at the Federal Reserve Bank pay close attention to
movements in the core
indexes. The Fed is particularly concerned about
how higher petroleum prices might pass into other
sectors of the economy.
Core producer
prices - producer prices less food and energy -
rose 0.3% in May. This was consistent with the
consensus of forecasters and raises the likelihood
that the Fed will raise interest rates. Inflation
remains above Fed Chairman Ben Bernanke's target
range. The only question now is how many more
interest rate hikes will we get? The outlook for
inflation is significantly colored by energy
prices.
Gasoline prices surged in May. The
average retail price of gasoline in May was $2.95
per gallon, up from $2.79 in April. Gas prices hit
$2.99 per gallon on May 15 but then eased. In June
gas prices are rising and will likely surge as the
July 4 weekend approaches.
Until recently,
strong productivity gains have permitted producers
of most final goods and services to absorb higher
fuel prices and wage increases without pushing up
prices too much. However, May increases in both
core producer and consumer prices indicate that
energy price increases are spreading widely
through the economy, and the hawks will have the
upper hand at the June Fed meeting.
Although inflation is heating up, April
and May retail sales, jobs and wage data indicate
the economy is slowing, as do recent reports from
the automobile, housing and construction sectors.
International oil and commodities markets remain
the most important sources of inflation, but those
are beyond the reach of Fed policy. If the Fed
acts too vigorously to contain inflation, it risks
derailing the economic expansion and pushing up
unemployment.
Recent rhetoric from the Fed
indicates a much stricter monetary policy stance
than in recent years. If the hawks have their way,
the soft landing for the economy anticipated by
forecasters and the Fed could turn into a
recession.
The economy could be facing a
bout with stagflation.
Peter
Morici is a professor at the University of
Maryland School of Business and former Chief
Economist at the US International Trade
Commission. He serves on the Bloomberg and Reuters
macroeconomic forecasting panels.
