Inflation Mild As Industry Output Sags
By Caren Bohan Dec 15 5:17pm ET
WASHINGTON (Reuters) - U.S. inflation remained mild in November as the industrial sector showed further
signs of softness, bolstering expectations that the Federal Reserve may start cutting interest rates in the new
year.
The Consumer Price Index, the nation's main inflation gauge, rose a moderate 0.2 percent in November
for the second month in a row, the Labor Department said on Friday.
Tobacco prices and airfares boosted the closely watched ''core'' CPI, which strips out food and energy costs.
That index rose a slightly stronger 0.3 percent but economists said the underlying trend for prices would
offer comfort to Fed officials, who will meet Tuesday to deliberate interest rates.
But amid the reassurance on the inflation front, a report that the Fed itself issued on Friday underscored
concerns that the economy is rapidly downshifting.
TOO MUCH SLOWING?
``The famous economic slowdown is under way,'' said Robert Dederick, economic consultant at Northern
Trust Co. in Chicago.
``Rather than inflation, the main issue for the Fed right now is whether the economy is going to slow more
than they would like it to,'' he added.
In its monthly report on industrial activity, the Fed said production by the nation's factories, mines and
utilities fell 0.2 percent in November after a 0.1 percent drop in October. It was the first time since June
and July of 1998 -- when factories were buffeted by a global financial crisis -- that industrial output has
recorded back-to-back monthly declines.
President-elect George W. Bush, in a briefing with reporters, singled out the factory sector as an area to
watch as he highlighted the economic slowing as a justification for his proposed tax cuts.
``I think there is concern about some of the manufacturing base,'' Bush said.
The Fed, which raised interest rates six times between mid-1999 and May of this year, had sought to cool
the then-booming economy to prevent it from overheating and spurring inflationary pressures.
For several months, the U.S. central bank has officially maintained a position that economic risks were
weighted toward higher inflation. Many analysts believe it will abandon that position on Tuesday in favor
of a view that judges inflation and an economic downturn to be equal threats to the economy.
That could pave the way for interest rate cuts sometime in the new year. Depending on the economic
data, particularly figures on holiday spending by consumers, some economists think a rate cut could come
as early as Jan. 30-31, the first Fed policy-setting meeting of 2001.
The overall CPI gain in November matched the expectations of U.S. economists in a Reuters survey. But
the core rate slightly exceeded the forecasts for a 0.2 percent rise.
That troubled the inflation-sensitive bond market, where prices dipped in early trading but later regained
some ground.
Neither the CPI nor the industrial production data had much direct impact on the U.S. stock market, which
suffered big sell-offs.
The Nasdaq composite index ended down 75.53 points, or 2.77 percent, at 2,652.98, according to the
latest data, while the Dow Jones Industrial average sank 240.03 points, or 2.25 percent, to 10,434.96.
Economists worry sliding stock prices could exacerbate the slowing in the economy as they put a dent in
consumer confidence and crimp the ability of companies to invest in new plants, equipment and
technology.
The CPI report showed that tobacco prices surged 3.6 percent in November, which was a major reason for
the strength in the core CPI. But the tobacco costs are related to the settlement of lawsuits against
cigarette companies and are not seen as a symptom of inflation in the broader economy.
A SQUEEZE FOR COMPANIES
Most major CPI components were benign. Food costs were flat and energy prices, which have rocketed 16
percent over the past year, gained only 0.1 percent in November. Housing prices and medical care costs
both edged up 0.2 percent, while apparel prices sank 0.4 percent.
Although the latest inflation figures were tame, on an annual basis the CPI has been running at the upper
end of where many Fed officials would like to see it. In the 12 months ended in November, the CPI was up
3.4 percent, pushed higher by surging energy costs. The core CPI was up 2.6 percent.
Fred Breimyer, chief economist at State Street Bank in Boston, said inflationary pressures will subside as
the economy slows, ``although they will still be there to some degree.''
He added: ``I think what's happening is that firms are going to face a squeeze as their costs continue to
rise. They are seeing higher energy prices and in some cases higher labor costs. But they are finding this
difficult to pass along to consumers.'' siliconinvestor.com |
