EYE ON
AMERICA Producer price rise won't move
Fed By Peter Morici
The
US Labor Department has reported the producer
price index rose 2.0% in November, after falling
1.6% in October.
In November, food prices
rose 0.1% and energy prices rose 6.1%; however,
the previous month, food and energy prices fell
0.8% and 5.0%, respectively
Core producer
prices - producer prices less food and energy -
rose 1.3% in November, after falling 0.9% in
October.
Even when food and energy prices
are removed from the index,
producer prices are much more
volatile than consumer prices. The November
increases in producer prices should not be viewed
with alarm, because of past monthly declines. Over
the past year, producer prices, including food and
energy, have risen only 0.9%, and consumer price
inflation is likely to moderate through the early
months of 2007.
The Federal Reserve will
want to see several more months of data before
changing interest rate policy, and no change is
likely at least until the March 27-28 meeting of
the Open Market Committee. My quarterly forecast
does not build in an interest rate change until
the May 10 meeting.
Growth should moderate
to about 2.1% in the fourth quarter and rebound to
near 2.5% in the first half of next year.
Some consumer optimism will be needed to
power this recovery, as the fall in housing starts
is likely to weigh down growth through the second
quarter.
Prices for new and existing homes
have moderated, not collapsed, and overall these
have risen about 55% over the past five years.
Recent adjustments in existing and new home prices
should be viewed as healthy, reining in
speculations in land values. Once completed, these
adjustments should help establish the framework
for price stability and healthier growth less
dependent on property speculation and borrowing.
Gasoline prices are rebounding a bit in
December but are not climbing to the menacing
levels seen last summer. Overall, more moderate
energy prices are cushioning the effects of the
modest adjustment in home prices on consumers, and
homeowners still have considerable untapped
equity.
Falling energy prices, moderating
inflation and decent holiday sales will further
strengthen corporate profits and investor
confidence. If the new Democratic majority in
Congress does not spook the bond and equity
markets with talk of aggressive new spending
initiatives, taxes, or business regulations, the
stock market rally will remain robust into the New
Year.
Household savings performance will
improve, and ordinary investors should shift from
buying bigger homes to buying stocks. Also, a
lower dollar against the euro and other currencies
is sparking interest in US equities.
Moderate inflation, stronger company
fundamentals, and stronger demand from ordinary
investors and from abroad should push stocks
higher in 2007.
Peter Morici is
a professor at the University of Maryland School
of Business and former chief economist at the US
International Trade Commission.
