US DATA PREVIEW: DECEMBER INFLATION LED BY ENERGY, LITTLE ELSE
By Kevin Kastner
WASHINGTON (MktNews) - Analysts' expectations for the December U.S. inflation report show that price
pressures are concentrated in a few categories dominated by energy and that overall inflation remains tame.
Still, analysts surveyed by Market News International noted that even the lack of price pressures would likely not
be enough to keep the Federal Reserve from raising rates by 25 basis points at its next meeting in February. In
addition, a more severe Fed rate hike could be in the works if the currently low unemployment rate is combined with
suddenly strong inflation.
In the December report, the energy component should once again stand out as the main area of increase. Food
prices should come in only slightly higher than in November, while core prices such as vehicles should remain tame.
The Labor Department is scheduled to release the Producer Price Index at 8:30 a.m. EST Thursday and the
Consumer Price Index at 8:30 a.m. EST Friday.
In a survey of 21 analysts conducted by Market News International, the median forecast was for a 0.3% increase in
both overall PPI and CPI within a range of up 0.2% to up 0.4% for both. Core PPI is expected to rise 0.1%, within a
range of unchanged to up 0.2%, while core CPI is expected to rise 0.2%, within a range of up 0.1% to up 0.3%. In
November, PPI was up 0.2% overall and unchanged excluding food and energy. CPI was up 0.1% overall and up
0.2% excluding food and energy.
"As has been the case all year long, the December total will likely be pushed higher by surging energy prices," said
Joseph Abate, economist at Lehman Brothers, adding that wholesale energy prices are expected to rise 1.4% in
December after going up by the same amount in November.
At the consumer level, Abate expected a 1.5% rise in energy prices after a flat reading in the prior month. At both
the wholesale and consumer levels, a large surge in gasoline prices is seen as the culprit. Oil and electricity prices are
also expected to post modest gains.
Food prices are expected to post smaller rises, climbing only 0.1%-0.2% at the producer level and about 0.3% at
the consumer level. Food prices were boosted by vegetable products at both levels, and also by dairy and fruit prices
at the consumer level, analysts noted.
"The relatively mild 0.1% gain in core PPI that we anticipate is roughly consistent with its recent trend, however,
some uncertainties remain," Abate said, noting a report suggesting a cigarette tax hike in New York state. Although
taxes are not included in the PPI, Abate said, wholesalers may raise prices ahead of the tax hike.
"Further gains in prescription drug and tobacco prices should offset declines in computer and motor vehicle prices,"
said Jim Glassman and Bill Sharp, economists at Chase Securities, who expect core PPI to rise 0.1%. In addition, a
large surge in unadjusted tobacco prices in December 1998 may have boosted the seasonal factors, reducing the
adjusted tobacco component.
The pipeline measures of inflation are expected to show some signs of acceleration, particularly for steel products as
well as crude oil prices.
For consumer prices outside of food and energy, Glassman and Sharp expected a 0.3% decline in new motor
vehicle prices, reflecting heavy discounts and greater incentives.
In addition, the owners' equivalent rent category is expected to post a smaller-than-usual increase. On the upside,
tobacco, apparel, and hotel prices are expected to post larger gains, Glassman and Sharp noted.
David Greenlaw, economist at Morgan Stanley Dean Witter, suggested that signs point to rising shelter prices in the
coming months.
"The timing of the turnaround (in shelter prices) seems to have coincided with the adjustments the BLS made to their
sampling techniques. While the full impact has been partially masked in the past couple of months by unusual softness in
hotel rates -- one of the smaller components within the shelter grouping -- an acceleration in housing costs is expected
to exert some mild upward pressure on core CPI going forward," Greenlaw said.
For 1999 as a whole, PPI prices are expected to be up 3.0%, compared with an unchanged reading in 1998, and
up about 1.1% excluding food and energy, analysts said. CPI is expected to be up 2.8% year over year, and up 2.0%
excluding food and energy.
While the December report suggests a soft reading on inflation, analysts have already factored in another rate hike at
the February Federal Open Market Committee meetings. The real concern is that more inflation than expected may
equal a larger hike.
"On balance, this month's CPI report should be fairly moderate, but not enough to keep the Fed from moving in
February. Any acceleration in either the core PPI or CPI, however, would increase the odds of a 50bp move next
month," Abate concluded. |
