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Consumer prices rise heightening inflation concern { April 14 2004 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2004/04/14/business/14CND-ECON.htmlhttp://www.nytimes.com/2004/04/14/business/14CND-ECON.html
April 14, 2004
Consumer Prices Rise, Heightening Concern on Inflation
By KENNETH N. GILPIN
In another sign of a strengthening economy, the Government said this morning that consumer prices rose by 0.5 percent in March, led by higher energy and transportation costs.
Analysts had been expecting an increase in the consumer price index, but the numbers reported by the Labor Department were much higher than the consensus forecast of a rise of 0.3 percent. Consumer prices have now risen by four months in a row.
Excluding the volatile food and energy components, the so-called "core" inflation rate rose by 0.4 percent, the Labor Department said, the biggest monthly increase in two years. It is only the fourth time in the last decade that the monthly core rate of inflation has been so high. The other three months were in November 2001, January 1996 and January 1995.
Since the start of the year, the consumer price index has risen at a 5.1 percent annual rate.
That figure almost certainly overstates the true rate of inflation, analysts said. But the numbers reported this morning, coupled with stronger-than-expected March reports on employment and retail sales, suggest that the days of worrying about the dangers of disinflation, or falling prices, are over.
"Inflation has probably bottomed out for this expansion and is probably moving higher," said Dana Saporta, an economicst at Stone & McCarthy, an economic research and consulting firm based in Princeton, N.J.
"Core inflation is probably running in the 1.5 percent to 2 percent range," said David Resler, chief economist at Nomura Securities International.
"At the end of the day, the big part of core inflation is labor costs, and labor costs are not going to accelerate dramatically. It is too tough a world out there."
Still, concern about the threat of inflation has been visible in the bond market since early this month, and was on display again this morning.
Yields on 10-year Treasury notes, which have been moving erratically higher through April, spiked to their highest levels so far this year early in the trading session. But buyers stepped in during the afternoon and yields, which move inversely to bond prices, fell back a bit.
After rising to as high as 4.45 percent during the morning, by late in the day yields on the 10-year Treasury securities had retreated to 4.37 percent.
Still, that level represents a significant increase since the beginning of the month.
On April 1, the day before the Labor Department released March employment data that were much stronger than anticipated the 10-year was trading at a price to yield 3.88 percent.
Meanwhile, the stock market, which reacted negatively to a big rise in interest rates on Monday, seemed to take the day's bond market gyrations in stride.
All three major market indexes fell slightly.
At the close, the Dow Jones industrial average stood at 10,377.95, down 3.33 points on the day. The Standard & Poor's 500 index dipped by 1.27 points, to 1128.17. And the Nasdaq composite index dropped 5.23 points, to 2024.85.
Over the course of the last two weeks, the spate of stronger-than-expected economic reports, including the consumer price statistics, have shifted debate among analysts about when the Federal Reserve Board may begin to tighten monetary policy.
As recently as late March, the consensus view among economists was that the Fed was extremely unlikely to raise the overnight federal funds rate, the rate it most closely controls, at all this year.
The central bank has maintained the funds rate at its current level of 1 percent, a 46-year low, since last June.
Until very recently, Mr. Resler said he had not expected any tightening activity by the Fed this year.
Now, however, he said, "I expect the Fed will move by August at the latest, and possibly as early as June. This is a function of the dramatic shift in trend inflation, and how the Fed might react to that."
A rise in inflation measures unsettles bond traders, but economists said firmer prices are good news.
"You have to look at this as opportunistic pricing by companies," said Robert di Climente, chief United States economist at Smith Barney.
Concern about deflation, or falling prices, has been a worry at the Fed for months. And Mr. Resler said it has inhibited businesses as well.
"The threat of deflation not only influenced the Fed, but also businesses, who were afraid of not producing more goods than they could sell and were reluctant to hire more workers than they needed," he said.
"That threat has been eliminated."
Last month's rise in consumer prices was led by energy, which rose by 1.9 percent. Airfare prices rose by 1.1 percent and clothing prices gained 0.9 percent.
The Fed's policy-making Open Market Committee is scheduled to hold its next meeting early next month.
Analysts said they do not expect the central bank to decide to tighten monetary policy at that meeting.
But they will be watching closely to see if the language in the statement that follows the meeting will change from the words that have been used in recent months.
And they will be listening intently to what Fed chairman Alan Greenspan has to say next week, when he goes to Capitol Hill for an appearance before the Joint Economic Committee.
"You have to think that what Mr. Greenspan says or doesn't say next week will be important," Mr. di Climente said.
One particular buzz-word that Fed-watchers will be looking for is "patience," a word the central bank has used repeatedly in recent months to characterize its current approach to how it responds to the economy.
"If that word is not used, the bond market will react in a not particularly friendly way," Mr. Resler said.
Copyright 2004 The New York Times Company
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