CPI-some more
CPI May Hold the Key to Fed Rate Action: U.S. Economy Preview
Washington, Aug. 15 (Bloomberg) -- Tuesday's report on the
U.S. consumer price index for July may hold the key to when
Federal Reserve policy-makers next raise interest rates, and by
how much.
The CPI is expected to have risen 0.3 percent in July --
mainly reflecting higher energy costs -- after showing no change
in June and May, analysts said in a Bloomberg News survey. The
core rate of inflation, excluding food and energy, probably rose
just 0.2 percent last month.
Last Friday, a smaller-than-expected 0.2 percent increase in
July's producer price index calmed investors and sent government
bond yields lower. Investors concluded the Fed will probably opt
for a quarter-point increase in the overnight bank lending rate
next week, instead of something larger.
Investors are ''saying the Fed is only going to hit us with
a billy club -- not a sledge hammer,'' said Robert Dederick, an
economic consultant at the Northern Trust Co. in Chicago.
The Fed's policy-setting panel, the Federal Open Market
Committee, holds its next session Aug. 24. At its last session,
June 30, the Fed raised the overnight rate by a quarter
percentage point to 5 percent.
The federal funds futures contract for September delivery,
used by banks as a hedge against changes in the overnight bank
rate, has an implied yield of 5.23 percent -- suggesting most
investors are counting on a quarter-point increase next week. The
fed funds futures for January have an implied yield of 5.5
percent, a sign investors don't think next week will be the last
rate increase either.
Even though evidence of accelerating inflation is lacking,
rising labor costs suggest ''a rate hike is almost certain,''
said Don Hilber, an economist at Wells Fargo & Co. in
Minneapolis. The employment cost index surged in the second
quarter, while productivity growth cooled, and average hourly
earnings increased.
Greenspan's Warning
Fed Chairman Alan Greenspan, in his semi-annual report to
Congress, said he's more concerned about rising labor costs,
which could cause inflation to accelerate down the road. And by
all measures so far, ''labor cost measures have gotten worse,''
Hilber said. Labor costs account for about two-thirds of consumer
prices.
And there were also some signs of inflationary pressures in
the July producer prices report. ''Prices of basic materials --
like aluminum, burlap, scrap steel, paperboard -- are moving up
and could push up finished goods prices,'' said Chris Rupkey, a
senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in
New York. ''It's something that raises the risks of inflation,
and that's what the Fed is addressing.''
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