Data Stoke Inflation Fear, Fed Move Seen
Wednesday February 21, 1:00 pm Eastern Time
By Barbara Hagenbaugh
WASHINGTON (Reuters) - Surging energy costs pushed U.S. consumer prices up last month, the government said on Wednesday, but analysts still expect a big interest rate cut in March despite the threat of rising inflation.
The Consumer Price Index, the main gauge of U.S. inflation, rose 0.6 percent last month, the largest gain since March, the Labor Department said. In December, it increased 0.2 percent.
Excluding the volatile food and energy sectors, higher housing and tobacco prices contributed to a 0.3 percent gain in the core rate, which rose 0.1 percent in December.
A separate government report released on Wednesday showed the U.S. trade deficit declined for the third straight month in December, although for 2000 as a whole it hit a record level.
The consumer price figures were above analyst expectations and came less than a week after a report showed producer prices soared 1.1 percent last month. The combination of the two reports sparked concern that an inflation risk may lead the Federal Reserve to act cautiously when it decides if it should cut interest rates at its next meeting on March 20.
Fears the Fed will step gingerly pushed U.S. stock prices down in mid-morning trade, with the tech-laden Nasdaq market at times threatening to hit lows unseen in nearly two years. But by midday the Dow Jones industrial average was off just 0.1 percent to 10,719 while the Nasdaq had erased its early losses to post a 1.4 percent gain.
Analysts said January's prices were boosted by isolated factors that will disappear quickly. And, with other data painting a gloomy picture of the once-booming U.S. economy, the Fed is still likely to cut interest rates by a sweeping half-percentage-point next month.
``You can't freak out over one month's numbers,'' Schwab Washington Research Group managing director Greg Valliere said, adding that he still believes the Fed will cut rates half a percentage point on March 20.
``A week ago I would have said that it is a certain bet, but now I'd say it's a good bet,'' he said.
HIT BOTTOM?
Futures contracts on Wednesday showed investors were fully pricing in a quarter-point ease in short-term interest rates by the end of April and were pricing in about an 86 percent chance of a half-percentage-point cut by that time.
The Fed cut interest rates a full percentage point in two separate half-point moves in January to avert a recession in the world's largest economy.
Fears that the United States may be teetering on the brink of a painful recession, commonly described as two straight quarters of contracting growth, have driven consumer confidence to levels not seen in several years. A loss in confidence usually translates into declining consumer spending, which accounts for two-thirds of U.S. economic activity.
Treasury Secretary Paul O'Neill, when asked in an interview in USA Today published on Wednesday if the U.S. economy was already in a recession, said, ``No.''
But he added: ``I hesitate to say we've hit bottom.''
Aside from the staggering drop in consumer confidence, sharp declines in manufacturing output and persistent decreases in equity prices will likely lead the Fed to cut rates by a half-point in March, analysts said.
``My suspicion is between now and March 20 we'll see enough economic weakness to warrant a 50 basis point decline,'' Banc One economist Anthony Chan said. Fifty basis points is another way of saying a half-percentage-point.
TRADE DEFICIT NARROWS
In a separate report, the Commerce Department said on Wednesday the U.S. trade deficit soared to a record $369.7 billion in 2000, up from a 1999 deficit of $264.97 billion.
The record was reached even though the deficit -- meaning the United States imported more than it exported -- shrank for the third straight month in December, narrowing marginally to $32.99 billion from $33.13 billion in November.
December marked the first time that the deficit has declined for three consecutive months since mid-1995.
``Right now, the deficit seems to have been checked,'' said Fred Breimyer, chief economist with State Street Bank and Trust in Boston. ``But both exports and imports are under downward pressure, indicating economic weakness both here and abroad.''
On the inflation front, the Labor Department said the gain in consumer prices was led by skyrocketing energy costs, which accounted for more than half of the overall CPI rise.
Energy prices soared 3.9 percent in January after rising just 0.3 percent in December. The gain last month was the largest since a 4.1 percent rise in September.
Natural gas prices jumped 17.4 percent, the largest gain on record. Electricity costs rose 2.6 percent, the biggest rise since February 1980.
Food and beverage costs were muted, rising only 0.2 percent in January after a 0.5 percent gain in December.
Excluding food and energy costs, increases in shelter and cigarette prices were the ``principal factors accounting for the acceleration in January,'' the Labor Department said.
The Federal Reserve Bank of Cleveland said its median Consumer Price Index, another measure of inflation, rose 0.3 percent in January, matching December's 0.3 percent gain.
The Cleveland Fed's median CPI is a measure of inflation calculated by the bank based on U.S. government data. But unlike the Labor Department's core CPI, which excludes food and energy prices every month, the Cleveland Fed median CPI trims out any component whose price change markedly departs from the price performance of most items. |
