"Stock and bond prices are likely to decline Friday as a result"
Those numbers surprised Wall Street, which had expected core prices to rise just 0.1%. Stock and bond prices are likely to decline Friday as a result. The increase in core prices, after all, suggests that inflationary pressures continue to build despite tentative signs of an economic slowdown.
The Fed has raised the funds rate six times in the last year to prevent an outbreak of inflation, raising the key federal funds rate 1.75 percentage points to 6.5%. The increases haven't yet had a clear effect on inflation, but the economy is showing signs of slowing in response. The unemployment rate climbed to 4.1% in May, up from a 30-year low of 3.9% in April. And retail sales declined in April for the first time in 20 months.
Those numbers have delighted Wall Street. Investors, betting the coming slowdown will keep the Fed from raising the funds rate above 7% this year, have rushed to buy stocks. They have also been betting that the Fed will opt to leave interest rates unchanged this month because of a possible slowdown. Friday's producer-price data could rekindle expectations of a June interest-rate increase.
Fed policymakers still think the evidence of an economic slowdown is inconclusive, and one of them has suggested that even if the economy is slowing it will have to slow a lot more to end the risk of inflation.
Fed Governor Laurence Meyer, in a speech in Boston Tuesday, said the central bank may need slow the economy to an annual rate below 4% if it is to eliminate inflationary pressures that have built up after years of rapid growth. Most forecasters expect the economy to grow as much as 5% this year. For now, he said, the evidence suggests inflationary pressures have increased slightly "in the last six to nine months."
Still, the government's report Friday offered no conclusive evidence to support that claim. In annual terms, the Producer Price Index was up 3.9% at the end of May, the same rate as in April. Core producer prices were up 1.5% in annual terms at the end of May, up from 1.3% in April.
The Labor Department attributed the stability in overall producer prices in May to declining energy prices, which account for 14% of the index. Energy prices fell 0.5% in May after a 4.1% decline in April. Residential electricity prices declined 0.5% after a 0.2% gain in April. But gasoline prices rose 1.3%, rebounding from an 11.7% drop in April. |
