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Puck
The Texan
Joined: 05 Jan 2004
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 Sat Oct 15, 2005 9:28 am U.S. Sees Largest Burst of Inflation in 25 Years |
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By BARRIE MCKENNA
Saturday, October 15, 2005 Page B6
WASHINGTON -- The U.S. economy is showing signs of stress from hurricanes and an energy price spike, including sagging factory output, slumping consumer confidence and the biggest burst of inflation in 25 years.
Paced by a 17.9-per-cent jump in the price of gas, the consumer price index soared 1.2 per cent in September -- the largest monthly increase since March, 1980, the U.S. Labour Department said yesterday.
And while so-called "core" inflation, which excludes food and energy prices, was up just 0.1 per cent from August, economists warned that it's only a matter of time before energy costs filter through to other prices, and eventually to wages.
This is why most analysts expect the U.S. Federal Reserve Board to continue aggressively raising interest rates to keep inflation at bay in the months ahead.
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"The Fed can't wait for core inflation to pick up before they act," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C.
Mr. Vitner now expects the Fed to continue ratcheting up short-term rates at each of its next four meetings, taking its key rate to 4.75 per cent by next March.
The 1.2-per-cent rise in consumer prices was a lot higher than the 0.9 per cent analysts had forecast.
"Energy prices do matter, especially to the public's perception of inflation," said John Ryding, chief U.S. economist at Bear Stearns & Co. Inc. in New York.
Many economists have been waiting for the Fed to take a rate hike breather, after raising interest rates to 3.75 per cent from 1 per cent in the past 16 months.
The lack of inflation pressures beyond fuel may be partly explained by a statistical quirk in the CPI. A large chunk of the index is made up of rental costs, which go down when energy costs go up.
There's little doubt that investors have suddenly begun to fret about inflation. The yield on U.S. Treasuries has shot up nearly 50 basis points in the past month -- a basis point is 1/100th of a percentage point -- gold has hit an 18-year high and stocks have stumbled.
"At least one spooky theme behind these moves has been mounting concern that the latest spike in energy prices will cascade into other costs and prices, drive up inflation expectations and force the Fed to be even more fearsome than expected in its tightening campaign," Douglas Porter, BMO Nesbitt Burns deputy chief economist, said in a report. Reacting to inflation jitters, White House officials said they have confidence that the Fed will do what's necessary.
"The President has confidence in the Federal Reserve when it comes to monetary policy and their ability to address any inflation concerns," White House spokesman Scott McClellan said.
Rising energy prices also showed up in retail sales, which edged up 0.2 per cent in September, reversing a 1.9-per-cent decline in August. A 2.8-per-cent drop in sales of autos and parts was more than offset by a 4-per-cent rise in gasoline sales.
Economists continue to worry that higher fuel prices mean consumers will have less to spend on other items, including cars, clothing, travel and leisure.
"While the U.S. consumer appears to be in reasonably good shape, the risk lies in the potential for higher heating bills this winter to sharply curtail discretionary household spending," said Bank of Nova Scotia economist Adrienne Warren.
Meanwhile, industrial production fell 1.3 per cent in September, according to a report by the Fed, which blamed the Gulf Coast hurricanes and a strike at aircraft maker Boeing Co. Without those factors, factory output would have risen nearly 0.4 per cent.
The latest University of Michigan consumer sentiment index also picked up the impact of storms and energy prices, falling to a 13-year low. It dipped to 75.4 in mid-October from 76.9 in September.
Bear Stearns's Mr. Ryding played down the significance of the Michigan index, pointing out that job creation, not consumer confidence, is the main "driver of consumer spending." |
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