Jul 20, 2006

EYE ON AMERICA
It all points to a rate rise
By Peter Morici

On Tuesday, the US Labor Department reported the Producer Price Index increased 0.5% in June, after rising 0.2% in May.

Food prices rose 1.4% and energy prices rose 0.7%. These components of both producer and consumer prices are quite erratic month to month, and US Federal Reserve policymakers

pay particular attention to movements in the core indexes.
Core producer prices - producer prices less food and energy - rose 0.2% in June after rising 0.1% and 0.3% in April and May respectively.

The 1.4% jump in food prices should be viewed together with the 0.5% decline in May. Overall, food prices should not play a major role in inflation calculations through the summer and fall.

Wholesale prices for finished consumer goods indicate where core consumer prices are headed. The 0.2% increase in core producer price inflation adds weight to Fed chairman Ben Bernanke's concerns that rising petroleum prices are igniting inflation throughout the US economy.

Overall, wholesale price inflation continues at a pace that makes the Federal Reserve uneasy, even as economic growth slows. International oil and commodities markets continue to be the most important sources of inflation, but those are beyond the reach of Federal Reserve policy. If the Fed acts too vigorously to contain inflation, it risks a recession and stagflation.

Wednesday's consumer price data, which cover a broader range of goods and services, will further illuminate Federal Reserve options. However, the producer price data indicate that another interest-rate hike is likely, even if it poses considerable risks to growth.

The crisis in Lebanon and Israel has caused unwarranted panic in oil and stock markets. Spot prices for oil averaged about US$70 a barrel in June, and are now at about $76. That change should add about 15 cents to the price of a US gallon (3.785 liters) of gasoline and no more than a one-time 0.3% bump to the Consumer Price Index. Considering that gasoline prices were up 73 cents a gallon (19.3 cents a liter) in June from a year earlier, a 15-cent movement will hardly slay economic growth. Other factors, in particular higher interest rates and a flagging housing market, pose greater threats to growth.

If the Middle East crisis does not result in a supply disruption, oil prices should recede once tensions ease, and the crisis should not have an appreciable effect on US core inflation this autumn and winter. If the Fed does not overreact to the recent surge in oil prices, it poses neither an appreciable threat to growth nor to price stability.

Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission.

(Copyright 2006 Peter Morici.)

China Travel

China Tours

Yangtze River Cruise

Great Wall of China

China Airline

Map of China

Head Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong Kong
Thailand Bureau: 11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110