Inflation Tame, But Oil May Spell Trouble:
By Knut Engelmann Sep 15 2:01pm ET
WASHINGTON (Reuters) - New economic data released Friday showed inflation remained tame in the world's biggest economy in August, reinforcing expectations of steady interest rates next month, although rising energy costs may spell trouble soon.
The Labor Department said its closely-watched consumer price index, the broadest U.S. inflation gauge, unexpectedly fell in August -- the first monthly decline in more than 14 years -- as gasoline prices dipped temporarily. But excluding volatile energy and food costs, the so-called ``core'' inflation index rose 0.2 percent, matching last month's rise.
Separately, the Federal Reserve said U.S. industrial output rose moderately last month after being unchanged in July.
The news did little to change Wall Street's view that the inflation-wary Federal Reserve will keep credit costs steady when it next meets on Oct. 3 as it watches the U.S. economic slowdown unfold.
``The core inflation numbers remain quite good -- and that keeps the Fed on the sidelines,'' said Jeff Palma, an economist at UBS Warburg in Stamford, CT.
But analysts warned Friday's report shed little, if any, light on current inflation dangers, since energy prices have picked up substantially since the August data were collected and are likely to create inflation pressures in the months ahead.
``What was taken away in August is very likely to reappear in September,'' Patrick Jackman, senior economist at the Labor Department's Bureau of Labor Statistics, told Reuters.
He said a 6.0 percent fall in gasoline prices in August had shaved 0.2 percentage points off the overall CPI number.
``Certainly the September number looks to be substantially worse than the August number,'' he added.
Growing nervousness over the outlook for energy prices and their potential effect on future inflation hurt the bond market, where the price of the 30-year Treasury bond crumbled 1-1/2 points by midday. A shift of investor cash into shorter-dated maturities pushed up two-year notes.
President Clinton, speaking at the White House, said he did not think rising energy prices would hurt the economy in the foreseeable future.
``I think in the short to medium term, the answer...is no,'' Clinton told reporters when asked if Americans should be worried that high oil prices could lead to a recession.
The administration is considering releasing oil from the Strategic Petroleum Reserve to counter high crude oil prices, which have hit their highest level in 10 years this week.
SO FAR, SO GOOD
So far, Fed officials have expressed relief that rising energy prices have not caused core inflation to tick up substantially. While higher fuel bills inflate factories' production costs, they also have the benign effect of reducing consumer spending, the main driver behind the U.S. economy's steaming growth over recent years.
``I still believe investors will be focusing on the two-tenths of a percent rise in the core CPI,'' John Lonski, chief economist at Moody's Investors Service Inc. in New York, told Reuters Television.
``In the United States, energy prices have been rising. If you go to the average American and tell them energy prices declined in the month of August, you would think there was perhaps something loose upstairs,'' he added.
The Labor Department said overall consumer prices were up 3.4 percent from a year ago. Excluding food and energy, they rose 2.5 percent from August of last year.
Transportation costs fell 1.1 percent in August, despite a 1.5 percent increase in airline fares, Labor said. Other key components of the report, such as food, housing, apparel and medical care, showed modest price increases.
Analysts in a Reuters poll had expected both the headline and core CPI to rise 0.2 percent in August.
The Fed's industrial production report, meanwhile, showed mixed activity in the nation's manufacturing sector. The total output of the country's factories, mines and power plants rose 0.3 percent last month, it said.
But while the data depicted a slightly more vibrant industrial sector than most analysts had expected, analysts did not see the type of over-activity that could worry the Fed.
Separately, the Commerce Department said U.S. businesses built up inventories at the slowest pace in 15 months in July while sales of goods fell, adding to the picture of an economy slowing to a more sustainable pace of growth. |
