CPI May Hold Key to Fed Rate Change: Economy Preview (Update2)
By Vincent Del Giudice and Terry Barrett
CPI May Hold Key to Fed Rate Change: Economy Preview (Update2)
(Adds comment in 6th paragraph, changes dateline, date
references throughout.)
Washington, Aug. 15 (Bloomberg) -- The U.S. consumer price
index, set for release Tuesday, may hold the key to the size of
the Federal Reserve's next interest rate increase. For now,
investors are betting it won't be that dramatic a rate boost.
The CPI is expected to have risen 0.3 percent in July after
showing no change in June, mainly reflecting higher energy
costs, analysts said in a Bloomberg News survey. The core rate
of inflation, excluding food and energy, probably rose just 0.2
percent for the month.
Already, 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 opt for a
quarter point increase in the overnight bank lending rate
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.
``What the Fed is looking at is the potential inflation
pressures,' said David Orr, chief economist at First Union Bank
Corp. in Charlotte.
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.
``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.'
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.
Industrial Production and Housing
Other U.S. economic reports for release Tuesday will
probably provide little comfort for the Fed, which is also
worried that excessive growth and consumer demand may provide
the tinder for inflation.
Industrial production probably increased during July as
manufacturing accelerated after spending much of the past year
in the doldrums. Output at the nation's factories, mines and
utilities probably rose 0.8 percent last month, analysts said.
In June, orders increased 0.2 percent.
``The rebound in industrial activity reflects sustained,
strong domestic demand, very lean inventories, and an improving
global environment,' said David Greenlaw, an economist at
Morgan Stanley in New York.
The industrial report, from the Federal Reserve, is also
expected to show that the plant-use rate, which measures
industrial capacity in use, rose to 80.7 percent in July from
80.3 during June, analysts said.
Also Tuesday, the Commerce Department is expected to report
that starts of new housing construction accelerated in July,
rising 2.1 percent to 1.604 million at a seasonally adjusted
annual rate from 1.571 million in June, analysts said.
Other Economic Reports
In other reports this week:
-- First-time claims for state unemployment benefits
probably increased by 4,000 in the week ended Aug. 14 to a
seasonally adjusted 288,000 after rising by 4,000 a week
earlier. Still, the four-week moving average for jobless claims,
already at a 10-year low, is near a quarter-century low. The
Labor Department will issue the report Thursday.
-- The international trade deficit in goods and services
probably narrowed to $20.5 billion in June from $21.3 billion
during May as exports staged a rebound, analysts said. The
Commerce Department will release the trade report Thursday.
-- The Federal Reserve Bank of Philadelphia, in a report
set for release Thursday, is expected to report a pickup in
manufacturing in August in eastern Pennsylvania, southern New
Jersey, and Delaware, analysts said.
-- The U.S. government probably posted a narrower budget
deficit in July than a year earlier, $23.4 billion vs. $24.1
billion in July 1998, as the Treasury closes in on its second
consecutive annual surplus, analysts said. In June, the
government reported a $53.6 billion surplus, reflecting the
strong economy and bountiful tax revenue. The Treasury issues
the report Friday. |
