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To: Les H who wrote (249523)	7/11/2003 11:52:56 AM
From: UnBelievable	Respond to of 436258

DJ FED WATCH: US Deflation Story Still Lingering After PPI Yep - and be sure that you don't let the facts get in the way of a good story NEW YORK (Dow Jones)--The deflation story that's been the Federal Reserve's worst nightmare stayed very much alive Friday, with the release of data detailing wholesale price levels during June. The government reported that the producer price index for last month rose by a bigger-than-expected 0.5%, ending three straight months of declines. But once food and energy prices were stripped out, June wholesale prices actually fell by 0.1%, versus the 0.1% increase seen the month before. Wrightson ICAP analysts said year-over-year, the core PPI measure is now down by 0.3%, versus the annual decline of 0.1% the prior month. While the overall index rose in spite of being pounded by falling prices for autos and communications equipment, the report was nonetheless cited by economists as yet another sign the economy is, minimally, not seeing much in the way of meaningful inflationary pressures. That's bad news for the Fed. At its last two policy meetings, the latter of which resulted in an interest rate cut, central bank officials have said the lack of inflation is the biggest problem facing the economy. Even as they have seen the near-term outlook for growth as fairly balanced, Fed policy makers have argued already tame inflation may become even more so, which could bring the economy ever closer to a deflationary price environment. And that's somewhere virtually nobody wants to go. Deflation is a pervasive drop in prices that retards demand as consumers hold off on spending in anticipation of cheaper prices in the months ahead. It also makes debt servicing more difficult, both at the business and consumer level. To be sure, in its official pronouncements the Fed has been careful not to use the word deflation, and has left the utterance of that loaded term to Fed officials via speeches or other discussions. The Fed has also called the possibility of deflation taking hold very remote, an assessment most economists agree with. The Trend Is Not Your Friend Still, for Merrill Lynch economist Gerald Cohen, it's likely to be some time before the deflation story goes away. "I think that you will continue to get disinflationary pressures, and you will continue to get disinflationary pressures because of the output gap," he said. Cohen was referring to the difference between the economy's potential growth levels and its actual rate of growth, a gulf that many analysts think will take some time to close. Cohen and others, as a result, believe fears over deflation and the difficulty businesses are having in raising prices will dog the economy for some time. Even when growth improves, an uptick in pricing levels will take some time to achieve. In many ways, that puts the pricing problem in the same camp as the dismal employment situation, which is also seen as lagging the broader performance of the economy. Some economists believe the problems manufacturers are having in passing price increases on to customers are likely to prove much longer lasting compared with pricing trends in the rest of the economy. Henry Willmore, an economist at Barclays Capital in New York, said that even with the PPI data, he was inclined to maintain his current forecasts for the outlook on the consumer price index. That's because U.S. manufacturing activity, especially in terms of employment levels, has been on a long standing decline as more and more capacity is shipped to lower cost overseas locations. Indeed, as of May, overall U.S. capacity utilization stood at its lowest level since the summer of 1983. "We've known for quite a while that U.S. manufacturers are suffering deflation," said Bob Gay, economist at Commerzbank Securities in New York. "The hollowing out of manufacturing is getting to be a long standing and increasingly troublesome issue," and between job losses and a near total lack of pricing power, this issue will eat away at producer level price trends well into the future, he said. That means for that nation as a whole, "the deflation issue has not gone away," he said.